What happened
Shares of Apple (AAPL 1.27%) were up by 2.6% by 11 a.m. ET today. The rise comes after Morgan Stanley (MS 0.10%) analyst Erik Woodring raised his price target from $175 to $180, highlighting five catalysts for the stock:
- Increasing iPhone demand
- Accelerating services growth
- New product launches
- Record gross margins
- A potential iPhone subscription
So what
While increasing demand for iPhones, the success of new product launches, and the iPhone subscription service are subject to debate, it's beyond doubt that Apple has a significant opportunity to grow services revenue and improve gross margin.
For example, while reported services growth was just 6% in the last quarter, Apple was hit with adverse foreign exchange movements. Nevertheless, on a constant currency basis, services revenue grew by 13%, easily in line with Woodring's expectation for double-digit services growth in 2023.
On its recent earnings call, chief financial officer Luca Maestri said that Apple's "installed base of active devices grew double digits and achieved all-time records in each geographic segment and in each major product category." With over 2 billion active devices, the company has ample opportunity to grow service revenue into that installed base.
Given that its services gross margin is nearly 71% compared to its products' gross margin of about 37%, the opportunity to expand margins by growing services revenue is clear.
Now what
Apple is growing its services revenue at an impressive rate, and the company has an underlying opportunity from increasing market share in international markets. An iPhone subscription service is highly likely to help the company to at least maintain its dominant market position.
That said, the key to the investment case is, as ever, the success of growing product sales, particularly the iPhone. If that goes to plan, then all the other catalysts mentioned by Woodring will come into play, potentially leading to a significant upside for the stock.
