Cowen Initiates Apple At Outperform, Says Services EPS Can Double By 2021

Apple Inc. AAPL shares traded higher Thursday following a high-profile initiation from one Wall Street analyst.

The Analyst

Cowen analyst Krish Sankar initiated coverage of Apple with an Outperform rating and $220 price target.

The Thesis

Moving forward, Apple Services will supply additional growth for Apple, while the iPhone will serve as an annuity, according to Sankar. He said EPS contributions from the Services segment can double by fiscal 2021 to around $6.

“Annual iPhone sales approaching replacement demand levels, product launch catalysts, and capital returns support also help underpin our positive view,” Sankar wrote in a note.

Services is already Apple’s second largest segment, accounting for about 14 percent of total sales. Sankar is forecasting 18 percent compound annual revenue growth from Services over the next three years.

The best part about Services accounting for a large part of Apple’s growth, according to Sankar, is that Services margins are extremely high at greater than 60 percent. Due to the high-margin nature of Services revenue, Sankar said Services could account for more than 35 percent of Apple’s earnings within the next several years.

Sankar estimates as much as 20 percent of Apple’s long-term EPS could come from recurring Services revenue driven by Apple Music, Apple’s streaming video service and other subscription services. This recurring revenue is highly coveted among investors, and Sankar said Apple’s opportunities are not fully appreciated based on its current earnings multiple.

In the near term, he said Apple product launch cycles will likely continue to be bullish catalysts for the stock.

Price Action

Apple's stock is up 16 percent in 2019. Shares traded at $182.83 at time of publication.

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