Wall Street sees further growth for Apple Inc. (AAPL) ahead, even after the stock's 2019 surge already puts it among the biggest gainers in the broader market.
Shares have pulled back a bit into the print as anxiety still surrounds the business in China and iPhone sales are expected to disappoint.
However, this is obscuring the long-term upside still present for the stock.
"We see upside on several aspects of the business as well as financials that remain underappreciated by investors, namely the transformation of the company to services, growth in the installed base, technology leadership, and optionality around capital deployment ― all of which together leads us to expect double-digit earnings growth and a modest re-rating for the shares," J.P. Morgan analyst Samik Chatterjee said.
While he expects a softer than expected earnings result on Tuesday evening, the company should continue to grow in 2019 as it pivots away from its flagship hardware products to wearables and services which could promote more optimistic guidance.
"Relative to third quarter guidance, we see upside to consensus expectation, where we believe the building momentum for iPhone unit sales, continued strength in Apple Watch sales, and availability of the second generation AirPods are likely to drive a more favorable revenue outlook than investors expect," Chatterjee reasoned. "While the strong run in AAPL shares YTD relative to the S&P does create a high bar of expectation from the second quarter print and third quarter guide, we believe a return to revenue growth [in the third quarter] will demonstrate to investors the momentum in services, wearables, and accessories to successfully offset declines in iPhone revenues and improve visibility around long-term growth."
Based on the optimistic outlook, he rated shares "Overweight" with a 2019 price target at $230 per share.
"We believe the stock can continue to work from here," Morgan Stanley analyst Katy Huberty said, building on Chatterjee's ideas. "Despite the 40%+ rally from the lows following the December quarter pre-announcement on Jan. 2nd, we see a number of reasons to remain bullish."
She cited the massive installed base that Apple can capitalize on for services revenue, with new offerings and a coming rebound in iPhone sales as key overlooked aspects for the business.
"iPhone data points stabilized early in the March quarter with a positive inflection in China active installed base share and Taiwan supplier monthly sales improving at March quarter end," Huberty explained. "Additionally, the recent Qualcomm (QCOM) settlement increases the likelihood of a 5G iPhone launch in 2020, which the stock typically starts pricing in 6-9 months early."
The increased visibility and shifting story for the stock is expected to invite institutional investors into the stock as well.
Many analysts have also pinpointed a potentially more aggressive capital allocation plan as a way to keep investors onside.
Apple has become increasingly aggressive with its initiative to become net cash neutral over time since 2018.
Following the announcement of the net cash neutral goal, the company approved a $100 billion stock buyback program and marked increases in dividend payments. Analysts expect that trend to pick up steam this year.
"We expect Apple to remain aggressive on the capital allocation front and forecast a 10% dividend increase, to $0.80/quarter/share and an increase to Apple's buyback authorization of at least $50 billion," Huberty estimated. "This would bring Apple's total buyback authorization under the plan announced a year ago to at least $150 billion, of which roughly $95-100 billion will be remaining following the March quarter."
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With the aspect added in, Huberty assigned a $234 price target to the stock, which would mark an all-time high for the stock.
It is worth noting that her price target is well above the FactSet consensus, which has held at $200.73 per share. That would suggest that much of the gains in the stock have already been realized, giving more credence to those cautious about a share reaction on earnings.
Given the myriad of aspects providing upside, Huberty could well be proven right in the long term. The issue is that there is a significant lack of clarity until more details are available in evening hours.
"The fact is that for these shares to truly break out the recent top of $207 has to be taken and held on a re-test," Real Money contributor Stephen Guilfoyle said. "It is only then that we see the move that I have been waiting for."
To hear more about how he is playing the stock as the prominent print comes through, click here.