Shares of Apple (AAPL) are on the rise after Needham analyst Laura Martin upgraded the stock to Strong Buy as she believes the company is "most likely to prevail in a direct competition between FAANG ecosystems." Ahead of the company's March 25 event, Wedbush analyst Daniel Ives raised his price target for Apple to $215 as he views the likely announcement of a streaming video service as a "pivotal step" in further driving the tech giant's services flywheel and a sign that Apple is entering the "streaming content arms race."
ECOSYSTEM VALUE UPSIDE: In a research note to investors, Needham's Martin upgraded Apple to Strong Buy from Buy, owing to Apple's ecosystem value upside, conclusions from her proprietary survey data, content services Apple will announce Monday and the company's "strong" Network Effects. The analyst noted that Apple has five types of Network Effects, including the strongest type, Hardware-Based Direct Network Effects. This suggests that Apple's ecosystem is the "most likely" to prevail in a direct competition between FAANG – Facebook (FB), Amazon (AMZN), Apple, Netflix (NFLX) and Alphabet's Google (GOOG; GOOGL) – ecosystems, she contended. According to Martin's first quarter proprietary survey, regardless of whether or not Wall Street believes Apple is an ecosystem company, "its users do." Further, Apple will announce a new content service on Monday that, if adopted by its users, the analyst believes should lower churn and drive higher lifetime value for each of the company's 900M unique ecosystem users and might even attract new users to its ecosystem. Additionally, Martin argued that iOS does not compete against Android and that a more accurate competitive framework is that Apple's ecosystem competes against Alphabet's ecosystem. The analyst also raised her price target on Apple's shares to $225 from $180.
'PIVOTAL' STEP: Meanwhile, Wedbush's Ives raised his price target for Apple to $215 from $200 ahead of the likely announcement of its "long awaited" streaming video service that will compete with the likes of Netflix, Disney (DIS), Hulu, among others. The analyst views this as a "pivotal step" in further driving Apple's services flywheel, and believes it will "only be the drumroll to a more transformative content acquisition during the course of 2019 for Apple." Ives noted that the services business remains the "wild card" in driving the valuation higher for Apple as he estimates the valuation of the services franchise for the company is worth roughly $400B on a standalone basis with this highly profitable segment poised to exceed $50B in revenues by 2020. Ives reiterated an Outperform rating on Apple's shares. His peer at Citi also increased his price target on the stock to $220 from $170, while reiterating a Buy rating on the shares. Analyst Jim Suva told investors that he remains positive on Apple shares "despite dour sell side sentiment," and expects the company to raise its dividend in April and increase its buyback authorization by another $100B, while generating an estimated $60B-$65B of free cash flow each year.
LAUNCH EVENT 'UNLIKELY' TO BE CATALYST: Not as bullish, JPMorgan Samik Chatterjee said that given an abundance of predictions on the announcement already widely publicized in the press, Apple's March 25 event itself will not be a catalyst for the shares. The analyst, however, noted that he is focused on the long-term drivers that could set up Apple's video service as a strong competitor to Netflix over time. While the ramp on user subscriptions for a new service, like video, is unlikely to drive a meaningful change to Apple's financials in the first few years, Apple has a relatively easier path to scaling the service given its access to a large installed base, and can differentiate in the early years by positioning itself as an aggregator of content, which could set it up for long-term success, he contended. The analyst reiterated an Overweight rating and a $228 price target on Apple's shares.
PRICE ACTION: In morning trading, shares of Apple have gained over 3% to $194.32.
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