Apple's (AAPL 1.03%) stock recently received a pair of price target hikes. An analyst at Piper Sandler raised its target to $225 per share from $190, while an analyst at Needham took a more aggressive view and raised the target to $260.
Price target hikes and Apple's growth prospects
The Needham analyst likes Apple's $110 billion stock buyback plan and believes it supports the share price. Meanwhile, the Piper Sandler analyst argues Apple's stock is riding a wave of optimism over the possibility of a bounce back in growth in iPhone sales in China, and the potential for artificial intelligence (AI) applications that could lead to an upgrade cycle in iPhones.
Why the upgrade cycle matters to Apple
Apple's revenue mix is changing, with its higher-margin services revenue (roughly double the gross margin of its product revenue gross margin of around 37%) representing 26.3% of revenue in the most recent quarter compared to 17.8% in 2019. Its service revenue growth is a function of growing subscriptions within its installed base of devices, which number more than 2.2 billion.
While the shift to services revenue will improve margins and cash flow via the long-term stream of income from subscribers, it's still critical that Apple can generate product sales growth by driving periodic upgrade cycles with innovative products. That's where the excitement around AI comes in and why the market recently got so excited about Apple stock.
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CEO Tim Cook thinks "AI, generative AI, and AI are big opportunities for us across our products." This opportunity can lead to a new cycle of product sales growth at a time when Apple is delivering on its services growth and margin expansion plans.
The Piper Sandler analyst has a point when referencing the recent stock run-up that reflects optimism over AI. Much of it appears to be in the price of the stock already. Apple still must contend with waning consumer spending at relatively high interest rates. Still, trading on 38 times Wall Street analyst estimates for 2024, Apple looks fully valued right now.
