The giants of the financial world are firmly in Apple’s corner. First, mega investor Warren Buffett‘s company became Apple’s third-biggest public shareholder. Now investment titan Morgan Stanley has issued a note to clients, outlining why Apple is likely to pass a major financial milestone in the next year.
At time of writing, Apple is trading at $188.51. However, according to Morgan Stanley analyst Katy Huberty the stock has the potential to hit a price target of $214. Should it manage this feat, Apple will become the first company in history to surpass $1 trillion in market cap.
The importance of Services
For once, Huberty’s analysis isn’t based on booming iPhone sales, but rather an increase in Apple’s Services business, which is becoming a more and more important part of the company.
“Services is fast becoming Apple’s primary growth driver,” analyst Katy Huberty said in the note. “Apple revenue grew at an 8 percent [compound annual growth rate] over the last five years, driven in large part by sales of its flagship iPhone. But as device replacement cycles extend and device installed base growth slows to single digits, we believe Services will pick up the growth baton and account for ~67 percent of Apple revenue growth over the next five years.”
Apple’s Services business — including the App Store, iTunes, Apple Music and iCloud — has been the fastest-growing revenue segment for the company in recent times. In the last quarter, it had 270 million customers: more than 2x the number of Netflix customers. (Although the comparison isn’t totally fair, since Netflix offers just one service, versus the cumulative services Apple sells.)
“We estimate that in the last 12 months, users have spent over $40 billion in the App Store, of which Apple collects a roughly 30 percent cut, implying the App sore generated slightly more than $12 billion of net revenue for Apple in the last 12 months, up 29 percent year-over-year,” Huberty continued.
Ticking off milestones
In the past, Apple has been the company responsible for passing numerous financial milestones. It was the world’s first $700 billion company, then the first $800 billion company in history, and more recently the first $900 billion company. If Apple hits Huberty’s price target, Apple would carry a $1.024 trillion valuation.
Obviously, it’s great news for Apple if it can pass the $1 trillion landmark. But even better, if Huberty’s analysis is correct about Services, is that it would show that Apple is no longer wholly reliant on the iPhone for its value.
True, if the bottom dropped out of the iPhone business tomorrow Apple would suffer. But as analysts like Above Avalon‘s Neil Cybart have argued, Apple’s share price no longer relies wholly on Apple’s smartphone business.