Apple (AAPL -0.40%) sprung to life on Tuesday, Dec. 7, after Morgan Stanley analyst Katy Huberty painted a $200 price target on the stock that sent shares of the tech titan to an all-time high closing price of $171.18.
Huberty increased her Apple price target from the earlier level of $164, citing an increase in iPhone shipments during the holiday period, as well as the emergence of other catalysts such as augmented reality/virtual reality (AR/VR) and autonomous vehicles. Even better, Morgan Stanley wasn't the only firm painting a bright picture about Apple's prospects.
KeyBanc Capital markets initiated its coverage on Apple stock with an overweight rating and $191 price target, pointing out that the shift to 5G devices will continue to drive iPhone sales, while the services business is also on track to grow at a robust pace. The reasoning of these Wall Street firms behind their bullish take on Apple points toward three key reasons that are likely to drive the company's growth in the long run. Let's take a closer look at them.
Apple's iPhone momentum is here to stay
While there has been chatter about supply chain disruptions causing weak iPhone demand during the holiday period, Morgan Stanley's checks indicate that the headwinds may not be as severe as originally expected. Huberty increased her iPhone shipment forecast for the quarter that ends in December to 83 million units, up 3 million units from the prior estimate.
The analyst said that the supply chain constraints have eased in the current quarter compared to the quarter that ended in September. As a result, Apple's iPhone shipments are likely to increase by 4% year over year, which should be considered an impressive feat amid the supply chain challenges it is still facing. KeyBanc analyst Brandon Nispel, on the other hand, believes that the increasing adoption of 5G smartphones can continue to push iPhone sales to higher levels.
Nispel estimates that each 1% increase in 5G smartphone adoption could boost Apple's iPhone shipments by an incremental 11 million units. IDC estimates that 5G smartphones could account for 40% of global smartphone shipments in 2021, and their share could increase to 69% of the global volume in 2025. As Apple is one of the dominant players in the 5G smartphone market and the iPhone 13 is expected to further strengthen its grip over this space, it can be assumed that iPhone sales will continue to improve.
An unconfirmed report by Taiwanese publication DigiTimes estimates that Apple may be looking to increase iPhone production by 30% in the first half of 2022, with the company's overall iPhone shipments on track to hit 300 million units next year. With the iPhone producing more than 52% of Apple's revenue last fiscal year, the bright prospects of this segment could give the company a nice boost in 2022.
The services business can switch into a higher gear
KeyBanc believes that Apple's services business will likely grow at much faster rates as compared to the growth in the company's user base. The company's services revenue had increased 27% in fiscal 2021 to $68.4 billion, accounting for nearly 19% of the top line. Nispel estimates that the services business could hit $100 billion in revenue by 2024 and drive strong growth in Apple's bottom line.
The services business accounted for less than 10% of Apple's cost of sales last fiscal year and produced nearly a fifth of its total revenue, so the segment's growth will be a tailwind for Apple's earnings in the future. More importantly, Apple has been taking smart steps to boost the adoption of its various services, such as adding new membership tiers to Apple Music or bringing award-winning content to Apple TV+ that won the platform 11 Emmys.
The services business is Apple's second-largest source of revenue after the iPhone. So, it could ensure profitable long-term growth for the company, thanks to Apple's huge installed base of nearly 1.8 billion active devices and the availability of a wide range of services including fitness, music, video content, cloud storage, and gaming, among others.
Emerging catalysts could supercharge the company
Morgan Stanley's Huberty pointed out that the company's valuation should reflect Apple's moves in the autonomous vehicle market and the AR/VR space. Notable Apple analyst Ming-Chi Kuo believes that Apple could release its first-generation AR/VR headset sometime next year, and the company is reportedly working on a second-generation headset as well.
Kuo further adds that Apple's headsets could start at a price of $1,000 as they are likely to pack top-end features. The company could sell 2.5 million to 3.5 million units of these headsets in 2023, while the launch of the second-generation headset could send Apple's annual headset shipments to 10 million units and account for a substantial portion of the company's revenue.
Apple's entry into AR/VR headsets could open a huge opportunity for the company as sales of these devices could rise rapidly thanks to emerging tech trends such as the metaverse. IDC estimates that the global AR/VR headset market could increase from 9 million units this year to 50 million units in 2025, indicating that Apple could be making the right move at the right time to tap this lucrative opportunity.
On the other hand, Apple is reportedly engaged in the development of an electric-powered autonomous vehicle as well, which could hit the market as early as 2025. Huberty believes that Apple's entry into this space paves a clear way for the company to double its market capitalization and revenue.
As such, Apple seems well-placed to take advantage of multiple lucrative growth drivers such as 5G smartphones, autonomous cars, AR/VR headsets that could help it clock impressive growth in the long run, all of which make it a top tech stock to buy for the future.