AP Photo/Paul Sakuma
- On Monday, Needham analysts Laura Martin and Dan Medina raised their Apple price target to $350 from $280. The firm is now tied with Daniel Ives of Wedbush for highest Apple price target.
- The price target implies that Apple could surge 18% this year, according to Needham.
- Here are five reasons that the Needham analysts boosted their Apple price target.
- Watch Apple trade live on Markets Insider.
After a solid 2019, at least one Wall Street firm thinks that Apple is setting up for double-digit gains in 2020.
Laura Martin and Dan Medina, analysts at Needham, on Monday raised their Apple price target to $350 from $280. The price target is now tied with the previous Wall Street high — Daniel Ives of Wedbush also has a price target of $350 for of Apple. Shares of the company were relatively unchanged in early trading Monday.
Apple has a number of upside factors, including its compensation structure, direct relationships with the wealthiest consumers, and “gatekeeper” status, according to Needham.
The right way to think about Apple’s valuation, pricing power, competitive advantage period, and barriers to entry is “through the lens of its ecosystem dominance among the wealthiest smartphone owners in the world,” the analysts wrote in a note Monday.
Apple is committed to eliminating churn in its ecosystem, which is important because it maximizes lifetime value of its products and add-on services, according to Needham. New services such as Arcade, Apple +, and Apple Pay become “key upside value drivers because they lower AAPL’s ecosystem churn” and add new revenue per user each year, the analysts wrote.
In addition, the analysts lowered their rating on Apple from “strong buy” to “buy,” because Apple’s stock surpassed their previous price target in 2019, when it surged 86% versus the S&P 500 index’s 29% gain.
Here are the top five reasons that Needham likes Apple, wrote Martin and Medina.
1. Compensation structure
“AAPL’s compensation structure is a hidden asset, we believe,” the analysts wrote. Each of the four senior vice presidents who report to Tim Cook, Apple’s CEO, has identical pay and is paid “in lock-step” with each other, according to the note.
This is positive as it means that “each gets paid only if all get paid,” according to the analysts. The committee structure also adds “diversity of voices,” which improves business outcomes, increases consistency of strategy, and lowers investment risks.
In addition, Cook “repeatedly pushes compensation away from himself, which creates a culture from the top that AAPL’s priority is changing the world rather than employee wealth accumulation.”
2. FAANG network effects
The FAANG stocks — Facebook, Amazon, Apple, Netflix, and Google — will increasingly compete, and each benefits from powerful “network effects,” the analysts wrote.
Still, Needham says Apple would come out on top in a “battle among FAANGs.”
3. iPhone releases as sequels
Needham views Apple’s annual September iPhone releases “as sequels in a successful film franchise,” the analysts wrote.
The event lowers investment risks, the analysts argue, because of the installed base of iPhone “superfans” who will replace their phones.
4. The gatekeeper factor
“A key value driver for AAPL’s ecosystem is that developers create for AAPL’s platform first, to maximise their monetization,” the analysts wrote. Apple is indifferent to which apps are most popular on its platform, and it can require revenue shares from all apps, making it an “arms dealer” and gatekeeper, according to Needham.
That brings important recurring revenue for Apple, which is driving multiple expansion, according to the analysts. Apple generates about twice the revenue from app store downloads than Google Play on half the number of downloads, the analysts wrote, citing data from Sensor Tower.
5. Wealthy consumer relationships
Apple has direct relationships with 900 million of the wealthiest consumers in the world, who represent roughly 12% of the global population, the analysts wrote. Consumers continuously use phones to create an “always-on connected network,” making Apple a “pure play on mobile and out-of-home,” the analysts wrote.
Analysts have a consensus price target of $273.56 for Apple, and the equity has 27 “buy” ratings, 15 “hold” ratings, and seven “sell” ratings, according to Bloomberg data.
Apple gained 84% in 2019.
