Analysts are getting behind Apple's (AAPL) push away from being solely a hardware-based company, after CEO Tim Cook unveiled a myriad of programs underway at the company's "It's Showtime" event on Monday night.
The company's new non-hardware ventures include a revamped and inexpensive news service that will incorporate numerous respected publications aggregated into one place, a new payment program that will include both digital payments and a flashy new credit card, a subscription gaming service, and new video streaming offerings.
For full detail on the announcements, the Action Alerts PLUS team provided and in-depth analysis of each announcement here.
Shares have edged higher in pre-market hours on the news, implying an open that would bring the Cupertino, California-based company's market cap over the $900 billion mark once again.
A major part of the early positivity after the event is the warmth with which Wall Street has welcomed Tim Cook's vision.
Real Money's Tim Collins noted that the key aspect of the event to trade would be the reaction of analysts that have held so much sway over market sentiment in recent months.
Fortunately for Apple investors, the reaction has been overwhelmingly positive, garnering the Tim Cook-led company numerous price target raises on a more-sanguine outlook for Cook's much-touted services segment.
Ideally, if eps from service revenue--as opposed to handset--is factored in, analysts should be raising price target, $AAPL today...— Jim Cramer (@jimcramer) March 26, 2019
"We believe today's announcements support Apple's ecosystem approach, including an install base which now exceeds 1.4 billion devices globally to drive strong ongoing services revenue growth, and we expect the higher-margin services revenue growth to continue outpacing total company growth," Cannacord Genuity analyst T. Michael Walkley said. "Based on today's new Services product announcements increasing our EPS estimates and our valuation multiple, we have increased our target price from $185 to $230."
Walkley reiterated his "Overweight" rating, noting that the company's smartphone segment is looking as though it will stabilize, providing downside protection as the company sets forth ambitious targets outside of the core business.
Even for analysts less optimistic on the iPhone replacement cycle, the services focus offers attractive upside.
"We believe Apple has the potential to show services revenue upside in 2019, which could help offset some of the negative sentiment from a weaker iPhone year," Piper Jaffray analyst Michael Olson wrote on Monday night. "Based on the company's announcements of various new and updated services offerings today, we believe there is potential for services revenue upside in FY19, which could increase investor optimism around the growth of higher-margin revenue and drive slight multiple expansion."
Based on his forecasted multiple expansion, Olson raised his price target from $187 to $201, while maintaining an "Overweight" rating.
To be sure, the event was not without skeptics, many of whom pointed to a lack of transparency on pricing and rollouts for each of the new blockbuster ideas.
For one, the company's new partnership with the Wall Street Journal, set for a price tag below $10 per month, is provoking questions over just how that price tag makes sense to the news partners.
So does this mean I can cancel my @WSJ and @latimes subscriptions because I can get it all now for $10 a month? This seems like a big loser for the news agencies involved. Am I missing something? $AAPL— Ross Gerber (@GerberKawasaki) March 25, 2019
According to an internal memo at the Wall Street Journal, the content provided on Apple News+ will be a "curated collection of general interest news," not a full subscription. The restricted access would make more sense not only for the WSJ, but for the other involved media companies as well.
Another question mark is on the all-important aspect of cost in its gaming and streaming efforts, as no indication of pricing was clarified on the services.
"We believe Apple might be challenged in monetizing its own original content with users, given its limited scope relative to large content providers like Netflix, Amazon Prime, and [AT&T (T) ] HBO," J.P. Morgan analyst Samik Chatterjee cautioned.
That becomes an issue when high-profile names like Steven Spielberg, Jennifer Aniston and Reese Witherspoon are brought aboard to kickstart the new competitive content play. For reference, Aniston was listed as the second-highest-paid actress in the world in 2018.
The company will need to find a way to monetize its efforts to contend with the big-name headliners it has rolled out.
Still, this may end up being a timing issue rather than a strategy issue for Tim Cook.
Thinking about it, $AAPL might be reluctant to share pricing for TV+ and Arcade (both launching this fall) for now because it's planning to reveal bundles (possibly including hardware upgrades) at its September iPhone event.— Eric Jhonsa (@EricJhonsa) March 25, 2019
Additionally, considering Apple has one of the largest cash piles of any company in the world, that should make content cost much less of a concern. In fact, an acquisition of a content provider shouldn't be out of the question on that basis.
The only thing missing from the outlook that could have provoked more positivity would be an outline of health care initiatives, something Cook has said will end up being the true legacy of Apple in years to come.
"We still want to see Apple make a transformational acquisition that will make it a serious player in the health space," the Action Alerts PLUS team commented on Monday evening. "Still, we reiterate our view that Services and subscriptions are the future of Apple's earnings power and that AAPL is a stock to be owned for the long term as this transformation takes place, not traded."
With analysts once again getting behind the company after a plethora of price target cuts into the end of 2018 spelled a slump in shares, the argument to stay bearish on the long-time tech giant is only becoming more difficult to make.
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