Apple Adds a Bull as Cowen Sees Long-Term Strength in Services

(Bloomberg) -- Apple Inc.’s services business should help drive long-term upside in the stock while the iPhone will likely serve "as an annuity," Cowen said, starting coverage with a buy-equivalent rating. Shares are up 1 percent in pre-market, suggesting a fifth straight positive session.

“We view the Services business as an investable long-term theme as EPS contributions can double to $6 by fiscal year 2021, and increasing recurring revenues should drive a higher multiple,” analyst Krish Sankar wrote. The firm sees Apple “massively monetizing its installed base of products and charging for value added options (possibly including Siri) down the road.”

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While Apple has rallied nearly 30 percent off a January low -- reached after the company cut its revenue outlook -- the stock remains more than 20 percent below record levels hit in October. Much of the weakness has come on concern over the demand for the iPhone, particularly in the critical China market. On Tuesday, Longbow Research wrote that the product’s demand trends were going “from bad to worse.”

Cowen noted that smartphones were “a mature market” and that “a lack of revolutionary innovation and mispricing have led to well publicized iPhone challenges.” However, the firm added that given an installed base of 900 million units and the oldest devices approaching five years old, “annual iPhone shipments are running near replacement demand,” which was “potentially a supportive long-term annuity for device sales.”

Cowen’s initiation at outperform -- with a $220 target -- brings the number of buy-equivalent ratings on the stock to 23, according to Bloomberg data. BofAML upgraded the stock to buy on Monday.

Another 22 view the stock as a hold while just one firm has a sell rating on the stock. The average price target is $178.71.

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