Credit Suisse: Apple's 'Annuity-Like' Cash Flow Makes It Worth $150

Longer-term, the majority of Apple Inc. (NASDAQ: AAPL) Gross Profit could be annuity based. Credit Suisse’s Kulbinder Garcha maintained an Outperform rating for the company, while raising the price target from $140 to $150. Apple has been added to Credit Suisse’s US Focus List, since the stock is now considered one of its “top investment ideas.”

The market seems to be underappreciating Apple Services as a driver of Gross Profit. More importantly, the market appears to be underestimating the segment’s growth potential and “the annuity-type business it drives in terms of retention and replacement across the business,” analyst Kulbinder Garcha said.

GP From Services

Gross Profit from Apple Services has grown from $3.2bn in 2010 to $14.5bn, currently representing 15 percent of the group. Garcha expects GP from this segment to grow to $33.7bn, or 29 percent of the total GP by 2020.

The analyst expects GP to be driven by three key factors:

1. There is an installed base of more than 1bn active devices, and almost 600mn unique users “that are highly affluent and "transacting" (accounting for 66% of mobile commerce, spending 7x more than Android users),” the analyst commented.
2. Services spend per user is likely to accelerate from the current $61 to $113 in 5 years, “as uptake of service offerings including scale from Apple Pay, Apple Music and iCloud, takes hold and download revenues stabilize,” Garcha mentioned.
3. There are likely to be new service opportunities in the TV/Video market.

“While there are some hurdles to overcome, our joint work with the Media team concludes it is highly probable,” the Credit Suisse report noted. The EPS estimates for 2016 and 2017 have been raised by 2 percent to $9.46 and by 5 percent $11.00, respectively.