Apple as the sum of its parts

At some point, says Piper Jaffray analyst Michael Olson, Apple’s revenue from services gets too big to ignore.

From a note to clients that tumbled into my inbox Monday morning:

Services accounted for 11% of Apple revenue in FY16, but we expect it will contribute a high teens % (modeling 17%) in FY20. As services approaches 20% of revenue, with a larger contribution to profitability due to higher margin vs. the core business, we expect many investors will shift to a sum-of-the-parts (SOTP) valuation. Looking ahead two years, valuing AAPL on FY20E, a SOTP analysis leads us to a value of ~$195/shr; discounted back two years (at 10%/yr) suggests a current fair value of $163. We remain buyers of AAPL due to expectation for growing anticipation around iPhone X (aka iPhone 8) and a strong trajectory for services revenue.

Maintain Overweight and $155 price target. 

What does a SOTP valuation of Apple look like? Trefis has been crowdsourcing them for years. Here’s a snapshot of the current model:

Click here for a live, interactive version.


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