Here's why one of Wall Street's biggest Apple bulls thinks the stock could surge 18% this year

Tim Cook apple
AP Photo/Paul Sakuma

  • On Monday, the Needham analysts Laura Martin and Dan Medina raised their Apple price target to $350 from $280. The firm is now tied with Daniel Ives of Wedbush for the highest Apple price target.
  • The price target implies that Apple could surge 18% this year, according to Needham.
  • Here are five reasons the Needham analysts boosted their Apple price target.
  • Watch Apple trade live on Markets Insider.
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At least one Wall Street firm thinks that after a solid 2019, Apple is setting up for double-digit gains in 2020. 

Laura Martin and Dan Medina, analysts at Needham, on Monday raised their Apple price target to $350 from $280. The price target ties that of Daniel Ives of Wedbush as the highest on Wall Street for Apple. Shares of the company were relatively unchanged in early trading Monday.

Apple has numerous upside factors, including its compensation structure, direct relationships with the wealthiest consumers, and "gatekeeper" status, according to Needham.

The right way to think about Apple's valuation, pricing power, competitive advantage period, and barriers to entry is "through the lens of its ecosystem dominance among the wealthiest smartphone owners in the world," the analysts wrote in a note Monday.

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Apple is committed to eliminating churn in its ecosystem, which is important because it maximizes lifetime value of its products and add-on services, according to Needham. New services such as Arcade, Apple Plus, and Apple Pay become "key upside value drivers because they lower AAPL's ecosystem churn" and add new revenue per user each year, the analysts wrote.

In addition, the analysts lowered their rating on Apple from "strong buy" to "buy," because Apple's stock surpassed their previous price target in 2019, when it surged 86% versus the S&P 500 index's 29% gain.

Here are the top five reasons Needham likes Apple, according to Martin and Medina.

1. Compensation structure

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"AAPL's compensation structure is a hidden asset, we believe," the analysts wrote. All four senior vice presidents who report to Tim Cook, Apple's CEO, have identical pay and are paid "in lock-step" with one another, according to the note. 

This is positive, as it means that "each gets paid only if all get paid," according to the analysts. The committee structure also adds "diversity of voices," which improves business outcomes, increases consistency of strategy, and lowers investment risks. 

In addition, the analysts said, Cook "repeatedly pushes compensation away from himself, which creates a culture from the top that AAPL's priority is changing the world rather than employee wealth accumulation."

2. FAANG network effects 

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The FAANG stocks — Facebook, Amazon, Apple, Netflix, and Google — will increasingly compete, and each benefits from powerful "network effects," the analysts wrote. 

Still, Needham said Apple would come out on top in a "battle among FAANGs." 

3. iPhone releases as sequels

Needham views Apple's annual September iPhone releases "as sequels in a successful film franchise," the analysts wrote.

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The event lowers investment risks, the analysts argue, because of the installed base of iPhone "superfans" who will replace their phones.

4. The gatekeeper factor 

"A key value driver for AAPL's ecosystem is that developers create for AAPL's platform first, to maximise their monetization," the analysts wrote. Apple is indifferent to which apps are most popular on its platform, and it can require revenue shares from all apps, making it an "arms dealer" and gatekeeper, Needham said.

That brings important recurring revenue for Apple, which is driving expansion, according to the analysts. Apple generates about twice the revenue from App Store downloads as Google Play on half the number of downloads, the analysts wrote, citing data from Sensor Tower.

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5. Wealthy consumer relationships 

Apple has direct relationships with 900 million of the wealthiest consumers in the world, who represent roughly 12% of the global population, the analysts wrote. Consumers use phones to create an "always-on connected network," making Apple a "pure play on mobile and out-of-home," the analysts wrote. 

Analysts have a consensus price target of $273.56 for Apple, and the equity has 27 "buy" ratings, 15 "hold" ratings, and seven "sell" ratings, according to Bloomberg data. 

Apple gained 84% in 2019.

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