Why Morgan Stanley raised its Apple price target

A proprietary survey shows iCloud, AppleCare and other Apple services climbing the S-curve to an inflection point.

From a note to clients by Katy Huberty that landed in my inbox Thursday:

We think the market underestimates both growth and value impact of Apple’s Services business. With a maturing, more engaged iOS user base and broadening portfolio of Services, we believe Services represents the key growth driver for Apple over the next 5 years.

apple services inflection point

Overall Services and specifically iCloud & AppleCare are approaching key 20% inflection point; a level of penetration historically associated in technology with higher growth velocity ( Exhibit 4 & Exhibit 5 ). App Store, the service with highest penetration today, experienced a growth acceleration when penetration topped 20% and we expect other services to follow the same path.

services inflection point

apple services inflection point

Maintains Overweight rating, raises price target to $253 from $226.

My take: With her survey and her S curves, Huberty sees Services revenue growing 20%+ per year for the next five, well above the Street’s consensus.

See also:


  1. Gregg Thurman said:
    I’m zeroing in on Apple Music penetration by 2023.

    At 14% today there’s a lot of headroom for future growth. What will that penetration look like when Apple starts making its as yet unproduced content available to its device users?

    Personally, I can see Apple Music/Video penetration accelerating faster than Huberty’s chart reflects.

    November 8, 2018
  2. Fred Stein said:
    Love it. Why stop at five years?

    I’m a big fan of S-Curves as well as Software and Services businesses. Apple is positioning iOS as a gaming platform, which could have decades of growth. To get an idea of the potential, think about the iPhone camera. In 2007, it was useful to document event and locations but not much else. No HDR, no telephoto, very few pixels and lousy pixels (which bleed). Lately the camera has been a driver for iPhone upgrades sales and is the basis of many App businesses. Gaming will likely drive iPhone upgrades since gamers love performance, and 30% of game sales can add up.

    November 8, 2018
    • Aaron Belich said:
      Fred, the next AppleTV has to ship with an Apple gamepad and 512GB of storage. With the power on display in the 2018 iPad Pros, it would be a massive challenge to the console crowd, but then also offer all the perks of cross-platform play, and cross-compatibility between other Apple devices (AirPlay). Apple already has digital distribution, headset voice chat (AirPods), multiplayer networking support, third-party developer support across the gaming spectrum – even Nintendo, and the hardware is practically already built – hello Mac Mini / AppleTV hybrid! Toss in all the other stuff that works great on AppleTV already.

      A new challenger has come forward.

      Or Apple could just buy Sony’s PlayStation division. I’d be okay with either.

      November 9, 2018
  3. John Butt said:
    As investors it is important to read posts by Analysts with a critical eye – even when you agree with their end conclusion. Being right but for the wrong reasons is hardly forecasting
    This analysis is simply too simple, a specific selection of “things” show an inflection point at 20% but the options for choice of things following an S curve is enormous. While I agree an S curve is likely, the inflection at 20% based on her reasoning is just plain wrong.
    I drive an electric car, I suspect the inflection point is close to happening at 1-2%, but that’s not relevant for a bunch of unrelated services, even her chart of the current state of each services shows that.
    However her target price looks good for many other reasons, just not a preference for 20% inflection points.

    November 9, 2018

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