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Investment bank Morgan Stanley raised its price target for Apple for the first time in eight months, based on its expectations of a new launch and a potential iPhone subscription program.
Recently, Morgan Stanley’s analysis of the percentage of Apple shares owned by pension funds and other institutions, led investors to recommend Buy Now. Key to that conclusion was what its analysts described as “5 particular tailwinds over the next six to nine months that make Apple a top pick for 2023.”
Now in a note to investors that see CamelMorgan Stanley raised its price target for Apple from $175 to $180 based on the same forecast. The new memo goes into more detail in its analysis, but the five factors, or “triggers,” remain as follows:
- “Exponential” growth services
- Record gross margins
- “pent demand” on the iPhone 15
- Apple AR Headset
- Subscription service enabled in devices
The new memo asserts that Apple still faces a “difficult macro background, FX [foreign exchange] The headlines “plus” iPhone production shortages and ongoing COVID restrictions. ”
“However, if we look beyond the near term, we see a catalyst-rich event trajectory over the next 12 months that investors are not appreciating.”
“Together, we believe the first 4 of these 5 catalysts have the potential to reclassify Apple stock toward the new sum-of-parts-driven $180 price target,” it continues, “with one hardware release of a subscription program key to unlock a bull-state-driven valuation.” LTV of $230.”
Morgan Stanley predicts that iPhone replacement cycles will “stretch to 4.4 years by the end of fiscal ’23,” which is “a new all-time record.” However, the company predicts that the average replacement cycle is “set to contract in fiscal 24, but cautiously assumed to be only 4.1 years.”
Analysts also believe that Apple’s services growth is underappreciated. On the face of it, services have regressed from “strong double-digit growth in FY ’21 to average single-digit Y/Y in the past 6-9 months.”
“However, the underlying cause of this slowdown was the most severe headwinds in the FX market that the company faced at the time we tracked the data,” says Morgan Stanley, which indicates that in a constant currency, services are still growing in low double digits. ”
In the near future, the company says, it expects to “re-accelerate services through the end of FY23 through FY24.” This expectation is driven in part by “120 million new iPhone users signed up in CY22 that could start Apple generating revenue,” as well as an improvement in FX.
Apple’s 2023 launches are key
Analysts say, “History shows that you want to own Apple stock 6-9 months before major product launches, with the launch of Apple’s new AR/VR headset and the launch of the iPhone 15 both major catalysts to come.”
Apple hasn’t announced either product, however, and the AR headset market is tough. However, Morgan Stanley believes that even if it takes a while for Apple’s headset to become a hit, it will.
“[Our] Analysis of new product category launches shows that the market has historically underestimated the long-term impact of new product/service launches, “continues,” which is on average about 6% of revenue in any given year (over the past 5 years) ).
Morgan Stanley is less confident that Apple will launch its rumored iPhone subscription service, but argues that if it did, the impact on its share price would be massive.
“The hardware subscription launch will help unlock more than 1 terabyte of market capitalization and stock revaluation for a $230 bull case valuation,” the company says.
“What we’re most excited about as an Apple analyst today is the shift in business model that Apple is going through,” he continues, “the shift toward a model focused on proven base income rather than unit growth, which in our view is increasingly arguing for valuation more commensurate with the business. It’s like signing up [instead of a technology platform.]”
That $230 price target is even bigger than Morgan Stanley’s previous price high of $210, which came on the back of a record high in 2021.