Apple's Services Growth 'Remains Paramount,' Says Bullish Argus

Apple Inc. AAPL reported forecast-beating fiscal second-quarter results Tuesday and guided third-quarter revenue above the consensus estimate.

The Analyst

Argus analyst Jim Kelleher reiterated a Buy on Apple and raised the price target from $225 to $250.

The Thesis

Apple's Services revenues hit an all-time high of $11.5 billion in the quarter. The Wearables and Home revenues also surged, making it the only segment to see sequential growth from the seasonal first-quarter peak, Kelleher said in a Wednesday note. (See his track record here.) 

Strength in the higher-margin Services business, with its recurring revenue streams, has mitigated the impact of a sharp decline in iPhone unit shipments, the analyst said. 

With the coming generations of iPhones unlikely to contain transformative features, Kelleher said the Services business remains paramount, particularly in the intermediate term.

Following the resolution of the legal battle with QUALCOMM, Inc. QCOM, Apple is now better positioned to fully compete in the coming battle for 5G device market share, Kelleher said. The company should be 5G-device ready by fall 2020, he said. 

Despite sizable iPhone unit shipments, Argus models flat EPS for 2019, as higher ASPs offset the volume weakness.

"With bottom-line growth resuming, AAPL is attractive compared to its historical valuations and to peer average multiples," Kelleher said. 

Argus also noted that the cash flow outlook is largely intact, making the stock particularly attractive on a DFCF valuation.

The Price Action

Apple shares have gained 34 percent year-to-date.

The stock was down 0.48 percent at $209.51 at the time of publication Thursday. 

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Photo courtesy of Apple.