3 Reasons To Love Apple Right Now: iPhone, Services, Wearables

The key to Apple Inc. AAPL's growth is the company leveraging its "stable" iPhone business to generate new revenue within the higher margin Services business, according to Jefferies.

The Analyst

Jefferies' Timothy O'Shea initiated coverage of Apple's stock with a Buy rating and $265 price target.

The Thesis

The bullish case for Apple is based on three positive catalysts, O'Shea said in a note.

iPhone

The iPhone business, while mature, remains stable as the company has sold more than 200 million iPhone units in each of the past four years. Even if Apple sees declining iPhone unit sales in 2018 or 2019, the iPhone business will still be considered a growth business.

Services

O'Shea said Apple can leverage its "massive" iPhone user base to grow its already big Services business. Looking forward to fiscal 2022, the Services business could account for 25 percent of all revenue at more than $80 billion and account for 40 percent of total gross profit. Investors should appreciate Apple's ability to distribute services directly to its ecosystem. For example, Apple Music doesn't hold the No. 1 rank in streaming music but it did gain 50 million paying subscribers in just three years.

Wearables

Apple's wearables (Watch, AirPods) is likely to account for $13 billion of fiscal 2018 revenue which represents a 48 percent year-over-year growth. This type of growth appears to be sustainable as Apple users are known to "spend heavily" on new products that plug into Apple's ecosystem. Over time the company should add new product lines like glasses, hearing aids, and fitness tracking devices.

Price Action

Shares of Apple were trading around $216.92 at time of publication. The company it set to release earnings Nov. 1.

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