Here's Why We're Boosting Our Apple Price Target
We continue to see Apple and iPhone benefitting from the coming AI-on-device upgrade cycle
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* We are lifting our Apple price target to $220 from $205 to reflect higher margin prospects despite near-term iPhone softness.
* We continue to see Apple and iPhone benefitting from the coming AI-on-device upgrade cycle.
* Apple’s record-setting buyback program and dividend increase are near-term band-aids while near-term Product margin slack is offset by the growing high margin Services business.
We are boosting our price target on Apple AAPL shares to $220 from $205 to reflect the company’s improving margin profile that should accelerate further as iPhone volumes rebound in the coming quarters. Fueling that rebound is the expected AI-on-device upgrade cycle that should also drive improving volumes for Mac and iPad.
While iPhone revenue fell 10% year over year in the March quarter, weighing on Product segment gross profit dollars, margin gains at the already meaningfully higher Services business more than made up for that Product decline.
While many were rightly focused on the iPhone, they forgot about the positive mix shift as that higher margin Services business became a larger part of Apple’s revenue pie. We put ourselves in that very large group of people. Helping spur that mix shift was the 14% year-over-year revenue growth delivered by the Services business and the year-over-year gross margin increase to 75% for the Services from 71% in the year-ago quarter. For context, Apple’s Product gross margin was flat year over year at 37%.
What the March quarter showed is Apple’s profit generation is less dependent on the iPhone than in the past. Flip that around, and it means that as the iPhone and its other products rebound, we should see even better profit and EPS generation. That is what’s powering the increase in our AAPL price target.
Apple’s dividend increase to $0.25 per share as well as the record-setting increase of $110 billion to its buyback program are also contributing to that increase. To say that combination was something the market was not expecting would be something of an understatement given recent guidance from key suppliers, smartphone industry market share figures, and short interest levels for AAPL shares heading into last night’s report.
Some of the post-earnings pop we’re seeing in the shares is as much short covering as it is to Wall Street rejiggering profit expectations for Apple. Almost 57 million shares were short per the last short interest report from Nasdaq, which equates to just under two days to cover. That level of activity will support AAPL shares as we close out the week, and that short-term euphoria means we will keep our Two rating intact.
As much as we were impressed by Apple’s results and guidance that says more of the same is on the way in the current quarter, we are not going to chase AAPL shares. We have hoped to pick up more shares if AAPL shares sank after last night’s earnings report and guidance, but that opportunity isn’t going to present itself.
The good news is we have a hefty amount of AAPL shares in the portfolio, and today’s move in the shares will drive the portfolio’s year-to-date returns even higher. We will continue to look for opportunities to scoop up more shares before the AI-on-device upgrade cycle takes hold.
Given the pass Apple is now getting, odds are that means such an opportunity will be more market-driven than Apple driven. Should AAPL shares find their way back to the low $170s, it would be a good place to not only pick up some additional shares, but we would also likely revisit our One rating.
Near-term, two Apple events on the horizon should support the shares and could build investor enthusiasm for them. The first one is next week’s iPad-centric event. Next week brings Apple’s iPad event that is expected to unveil some of the company’s AI efforts as well as new models utilizing organic light-emitting diode displays, a positive for our shares of Universal Display OLED.
And in the coming weeks, we will have the 2024 WWDC, where Apple will showcase its next iteration of iOS, MacOS, iPadOS, and Apple Watch Software. The event is expected to be a showcase for Apple’s initial AI efforts, and we expect to hear ample chatter leading into the event.
As we approach this event, we’ll continue to monitor monthly revenue data from Taiwan Semi TSM as well as supplier comments during the May and June investor conference season. In those comments, we’ll be looking for confirmation that AI-enabled device launches are tracking for 2H 2024.
Confirmation of that would increase our bullishness not only for Apple but also for Qualcomm QCOM, Universal Display, Marvell MRVL, and Nvidia NVDA shares.
At the time of publication, TheStreet Pro Portfolio was long AAPL, OLED, QCOM, MRVL, NVDA.
