What happened

Shares of Apple (AAPL -1.04%) stock popped on Monday morning, up 3.1% through 11:15 a.m. ET -- but why Apple popped is owing to something that happened on Sunday. Specifically, last night, investment bank Goldman Sachs announced it was initiating coverage of the tech giant with a buy rating and a price target that looks as if it should be on a for-sale sign: "$199."  

And even though 45 analysts already cover Apple, according to S&P Global Market Intelligence -- and even though 34 of them already say Apple is a buy -- investors are sitting up and taking notice...that Goldman Sachs has finally noticed Apple.

So what

So what exactly has Goldman Sachs noticed about Apple that makes this banker think it's a buy? At its core, Goldman's note focuses on the fact that a lot of people own Apple products. There are currently 1.1 billion active iPhones alone out in the world, reports StreetInsider.com, and that doesn't even count all the Apple-branded computers, smartwatches, and other tech gizmos in existence.  

Goldman points to this "growing installed base of users" as its primary reason for optimism about Apple stock. Some might argue that a lot of people owning iPhones already means there's less room for Apple to grow its market share. But Goldman counters that the large installed base of Apple productions reduces customer churn (because Apple fans are loath to switch brands), even as it lowers customer acquisition costs when Apple wants to sell upgraded iPhones or launch new products and services.

In the analysts' view, these advantages will "more than offset cyclical headwinds to product revenue."

Now what

As for how Apple will grow specifically, Goldman is focusing primarily on Apple's ability to sell more services to use on its devices. From 33% currently, the banker expects Apple will grow services' percentage of Apple's gross profit to 40% over the next five years.

Why is this important? Well, consider that Apple's services revenue in 2022 made up only 20% of all Apple revenue. Yet these services generated 33% of gross profits. This means that services revenue generates above-average profit margins for Apple. It also means that the shortest path to growing overall profits is to grow services revenue -- and that if services revenue grows, then profits will grow even faster.

Granted, even assuming Goldman is right and Apple does grow as fast as analysts expect -- with 11% profits growth on average over the next five years -- there's still the question of whether this is fast enough to justify the stock price. After all, Apple stock does cost more than 25 times earnings today, giving it a PEG ratio of 2.3.

Personally, I find that a bit pricey for my taste. But as of today, Goldman Sachs -- like the majority of analysts on Wall Street -- think it's plenty cheap to rate Apple stock a buy.