Analyst: Apple's Services Narrative Is Largely Priced In; Stock No Longer Attractive

Apple Inc. AAPL's drive to grow its Services business hasn't helped much to overcome some of the fundamental weakness, according to KeyBanc Capital Markets.

The Analyst

Andy Hargreaves maintained a Sector Weight rating on shares of the Cupertino, California-based technology giant.

The Thesis

Apple's Services narrative is largely priced in, given that the valuation no longer appears attractive relative to other large services businesses, Hargreaves said in a Wednesday note. (See his track record here.) 

Over the past two years, Apple's valuation multiple has expanded by 30% despite downward revisions to forward profit estimates — and its growth being at the low end of consumer and tech mega-cap peers, the analyst said.

"A comparison to other mega-caps suggests the stock's multiple is now fair to full, regardless of what you want to call the Company," he said. 

Apple's user growth has been decelerating, with gross profit per user having likely declined to a 10% annualized rate over the last five years, Hargreaves said. 

Either or both of these trends have to reverse to drive growth going forward, the analyst said. 

With the new services Apple has launched, Hargreaves said the company is entering competitive markets in which success cannot be ensured by device sales alone, and the costs of doing business could be higher than those services where it has so far found success.

KeyBanc sees Apple's valuation as unattractive relative to peers that are growing much faster.

"Further, we see little that appears likely to change the multiyear trends in user growth and gross profit per user," Hargreaves said. 

KeyBanc views the shares as fully valued and prefers to own Facebook, Inc. FB and Alphabet Inc GOOGL GOOG instead.

Price Action

Apple shares were down 0.46% at $220.02 at the time of publication.

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