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Revising Apple Price Estimate To $180 On Services And iPhone Strength

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We are increasing our price estimate for Apple from $166 per share to about $180 per share, to account for strong momentum in the iPhone business and a robust outlook for the company’s services division. Our price estimate represents a slight premium to the current market price. In this note we explain the changes we have made to our forecast model for the company.

iPhone To See Growing Momentum With New Launches

The iPhone business is set for a strong fiscal 2018, driven by the launch of the iPhone X and, to a lesser extent, the iPhone 8 Plus device. The iPhone X could turn out to be more lucrative to Apple than previously estimated. Research firm IHS estimates that the 64 GB version of the smartphone costs about $370 to build, well below previous estimates, which pegged potential costs at as much as $581. This would imply that margins could be roughly in line with previous iPhones, and dollar gross profits are likely to be significantly higher, given the $1,000 starting price. Apple’s manufacturing ramp-up for the device also appears to be progressing well, with shipping times declining to as low as 2 to 3 weeks, from the previous estimates of as much as a month. Apple also has a wider lineup of legacy iPhones this year, including the iPhone 7, 6S and SE, which could cater to more price-conscious buyers (price range $350 to $669), allowing Apple to compete head-on with mid-range Android devices. Margins on these legacy devices could still be attractive, as they use a basic design that is more than 3 years old.

Services Business Will Outperform, Aiding Margins

Apple’s Services business has emerged as the company’s fastest-growing segment, growing by about 23% year-over-year in FY’17 to about $30 billion. The company has indicated that revenues could approach levels of about $50 billion by 2020. There are multiple trends driving Services sales. For instance, sales at the App Store could rise as Apple launches new developer kits such as the augmented reality-focused ARKit, which could enable a richer experience. Apple may also benefit from trends such as cord-cutting and a shift towards streaming video and music services, as the company earns a commission (typically 15% to 30%) from third-party subscriptions made on its platform. The Apple Pay business could also see revenues accelerate (albeit from a small base) over the next few years, as Apple has already done much of the heavy lifting in terms of building out the necessary infrastructure in many developed markets. As services account for a greater portion of Apple’s revenues, they could have a more positive impact on gross margins, while helping Apple reinforce switching costs around its ecosystem, protecting the high-value iPhone business.

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