FBR & Co initiated coverage on Apple Inc. AAPL Thursday with an Outperform rating and $185 price target.
Analysts Daniel H. Ives and James Moore felt that Apple’s software represented the “crown jewel” embedded in the company’s products and services.
That “crown jewel” would help lead Apple to become “the world's first $1 trillion company as mobile device hardware becomes increasingly commoditized,” the analysts wrote.
Looking ahead, Ives thought that Apple would capitalize on high-margins of 90+ percent in its services business.
The analysts estimated that in a high-growth scenario, “services could contribute up to 32 percent of Apple's total gross profit” in FY 2017, up from the 12 percent forecast for FY 2015.
“The company remains in the early days of growing key services, such as Apps, streaming TV services, and Apple Pay, which we believe will contribute to top-line/profit growth over the coming years as they become an increasingly larger part of Apple's vision,” according to the analysts.
Other areas for growth included the trend towards “bring-your-own-device” (BYOD) for enterprise that could “drive massive growth/profit potential with more device uptake, as the number of productivity apps increases, and as the company seeks more strategic partnerships.”
The analysts pointed out that the growth assumptions excluded the launch of any new device categories. Rather, Apple’s software, which ties its device ecosystem together along with the services it delivers, would be the driver for growth.
Ives concluded, “Ultimately, with Apple's consistent ability to deliver innovative upgrades/new products with a proven core technology platform at its backbone and impressive margins, we believe the company is well on its way to hitting a $1 trillion market capitalization.”
The analysts’ $185 price target was based on 20x the firm’s FY 2016 EPS estimate of 9.46.
Apple Inc. closed at $126.17 Thursday, down 0.48 percent, with a market capitalization of $737.85 billion.
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