Wall Street's confidence in Apple's (AAPL) ability to grow amid a tough time for tech is increasing.
Analysts bullishness is prompting widespread price target hiking. According to FactSet, 10 of 14 analysts providing price targets in the past month have raised their estimates, with some targets reaching as high as $300, as Apple's earnings results approach post-market on Thursday.
"Apple had not only the lowest P/E multiple amongst the large technology companies, it also offered one of the lowest Price-to-earnings multiple for every point of growth making it a strong value pick," J.P. Morgan analyst Samik Chatterjee wrote in his preview. "We continue to rate Apple Overweight and with a $272 Dec 2019 price target."
Services Segment Sets Up Future
Much of the growth that analysts expect toward their bullish price in the long term is driven by the services segment.
The services category includes iTunes, the App Store, the Mac App Store, Apple Music, iCloud, Apple Pay, and AppleCare.
"Current ~16x PE is a slight premium to historic 15x but still makes Services look undervalued," Jefferies analyst Tim O'Shea said in his initiation of coverage on Oct. 26.
O'Shea explained that the value of the services business is being underestimated as the core of the business migrates toward the segment.
"As the business rapidly mix-shifts towards this more recurring revenue model, we see upside to gross margin estimates over time with our 2022 estimates, 100 bps higher than the Street," he speculated. "Applying a higher 5-8x sales multiple to our 2022 estimate implies Services could be worth $111 to $177 per share over time, a significant opportunity."
To be sure, Bank of America analyst Wamsi Mohan sees possible deceleration in App Store performance, particularly in China, which would dampen O'Shea's bullish thesis.
He nonetheless set a "Buy" rating for the stock based on mitigating circumstances.
A tangential market that the company might be able to seize upon is eSports, which can help drive performance outside of services.
DA Davidson analyst Tom Forte told Real Money that he was recently convinced on the emerging growth engine in eSports by researching and visiting events.
"We are increasing our price target on AAPL to $265 from $230," DA Davidson analyst Tom Forte explained. "The $35 increase is a reflection of raising our long-term sales growth rate and margin projections on greater confidence in its ability to generate higher hardware and services (App Store) sales rates due to the emerging secular shift of eSports."
Total global revenue from eSports is slated to head over $1 billion next year and advance toward $2 billion in just a few short years, backing Forte's bullish take.
Forte added that Apple's dominance across multiple platforms will mean that eSports should allow for multi-segment growth.
"Fortnite is the best example of this," he told Real Money. "People aren't just playing it on a console, but on mobile, on iPad, whatever."
Concerns on China impact eSports as well, however.
"With mobile esports being so big in China and the Chinese government recently putting limits on new game content, there is some concern that it could pressure Services revenue, especially out of Asia," Action Alerts PLUS analyst Zev Fima told Real Money. (Apple is a holding in the Action Alerts PLUS portfolio.)
Investors will hope that a tweet from President Trump Thursday morning means that China fears could dissipate soon enough.
Just had a long and very good conversation with President Xi Jinping of China. We talked about many subjects, with a heavy emphasis on Trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina. Also had good discussion on North Korea!— Donald J. Trump (@realDonaldTrump) November 1, 2018
Wearables, given the increased popularity of the Apple Watch and Airpods, will be a pivotal part of earnings as well.
"With the September launch event standing out relative to the upgrade to the Apple Watch, we believe the momentum of the Series 4 Apple Watch will be in focus on the earnings call," J.P. Morgan's Chatterjee noted. "We believe investors will fully realize the acceleration in Apple Watch shipments [by January 2019] with the Series 4 watch likely featuring as a top grossing holiday gift item."
Analysts also keyed in on the ability of the company to capitalize on expanding its offerings into health demographics and beyond.
"AirPods and Watch should account for $13 billion in revenue (+48% year over year) in 2018," Jefferies' O'Shea said. "Over time AAPL could launch other products like AR/VR glasses, hearing aids, and health/fitness trackers, etc."
Fitness trackers have made Fitbit (FIT) a $1.5 billion company, so it could be a profitable venture if a tech giant like Apple branches out or adds more functionality to its Watch offering to squelch Fitbit's competition.
Investors in Fitbit and Apple might need to listen in to Tim Cook's comments, in that case.
Apple shares are seesawing Thursday. Cook will look to deliver on the positivity Wall Street has laid out on earnings. Keeping estimates at their currently lofty heights might depend on it.