Apple (Shutterstock photo)
If you think the so-called “peak Apple (AAPL)" has arrived, you’re not paying attention. Although it’s true that shares of Apple have been on a tear in 2017, soaring more than 21% already, there are no signs of it slowing down, thanks to the company’s services business. You heard that right. Apple no longer lives on iPhones alone.
Apple stock closed Wednesday at $140.46, netting yet another all-time. Wednesday’s gains were driven by an upgrade from RBC Capital analyst Amit Daryanani, who, while reiterating his Outperform rating on AAPL stock, raised his price target to $155 from $140. Daryanani believes the tech giant’s fast-growing services business will be a driving force in the quarters and years ahead.
"Apple's Services business has the potential not only to lift gross margins but to reduce cyclicality, further strengthen the Apple ecosystem and expand the range of strategic alternatives at management's hand," Daryanani said in a research note to investors Wednesday. Services revenue, which includes Apple Music, the App Store, iCloud, Apple Care and Apple Pay, grew 17.5% year over year to $7.17 billion, topping analysts’ first quarter forecasts of $6.91 billion.
Services, which accounted for 9.2% of Apple's total revenue in the first quarter, has quickly become Apple's second-largest business segment, which has helped the company to become better balanced. CEO Tim Cook has plans in place to double the company’s services business in the next four years, reaching $48 billion to $50 billion in revenue, up from $25.5 billion in revenue over the last 12 months.
The gains Apple has made in services have been rewarded by Wall Street, which has given Apple a higher trading multiple than the Cupertino-based company has been accustomed to. Based on Wednesday’s closing price, AAPL stock is priced at 16 times fiscal 2017 estimates of $8.94 per share. That P/E is more than three points above where AAPL shares were valued a year ago.
Despite the increased level of confidence, the shares still appear undervalued relative to the S&P 500 index, which is priced at a forward P/E of around 18. When adjusting out Apple’s cash stockpile of more than $250 billion, that P/E drops closer to single digits, which means Apple is arguably the cheapest stock in the entire market.
This means assuming AAPL stock was priced inline with the rest of the market, it would trade today at around $160 to $170, or more than 15% to 20% higher. Notably, this is even though Apple, which pays a dividend yield 1.64%, already ranks as the best-performing stock in the Dow Jones Industrial Average. This is what billionaire investor Warren Buffett, widely regarded as the best value picker of all time, realized when he bought Apple at under $100.