Apple Services Segment Continues To Exceed Expectations

Apple Inc. AAPL's Services segment stood out in the company's fiscal fourth-quarter earnings on Thursday, KeyBanc's Andy Hargreaves said in a report.

Coupled with strong expectations for the iPhone X, the analyst maintains an Overweight rating on Apple's stock with a price target boosted from $187 to $192.

In fact, Apple's Services segment exceeded expectations, even when factoring in a one-time $640 million benefit the company realized in the quarter, Hargreaves said. Total revenue from the segment rose from $6.3 billion in the same quarter a year ago to $8.5 billion. But as many would expect this rate of growth can't be sustained over time and is expected to slow to 23 percent in fiscal 2017 and then dip to 10 percent growth in fiscal 2018.

Nevertheless, the strong performance seen in the Services segment during the quarter is reason enough to justify a higher multiple on Apple's stock from 8.5x EV/EBITDA to 9.0x.

iPhone X Ahead

Beyond the Services segment, expectations for an iPhone X supply constraint in the fiscal first-quarter prevents investors from getting a "clean view of normalized demand" but should still prove to be a "favorable dynamic" for Apple, Hargreaves wrote. On the other hand, a ramp in iPhone supply through the fiscal first quarter could create a headwind as investors may view this as a sign of underperforming demand for the high-end smartphone.

"We recommend owning AAPL," the analyst said. "The Company continues to drive excellent services growth, which creates a more stable profit pool than hardware, and appears well positioned to increase gross margins through FY18."

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