KeyBank initiates Apple coverage: Overweight, $191

From CNBCPro, which snagged the note from analyst Brandon Nispel:

“AAPL’s user base is growing across products and geographies; its user growth fuels growth in Services, creating AAPL’s ecosystem competitive advantage,” KeyBanc’s Brandon Nispel said in a note Sunday.

KeyBanc believes services will be a key profitability driver, given services have about 70% gross margins versus hardware gross margin of 33% to 35%. Services revenue should grow to over $100 billion by fiscal year 2024, according to KeyBanc.

“We believe as iPhone users grow, services revenue should grow at rates that are multiple times faster than the user base as consumer adoption and usage of Apple’s broad array of services grows,” Nispel said.

Apple also has a “best in class” return on invested capital, KeyBanc said. The firm estimates Apple generated 42% ROIC in fiscal year 2021 while its Big Tech peers generated a 20% ROIC.

“While AAPL is expensive by historical valuations, we find AAPL attractive relative to other mega-caps given AAPL’s superior ROIC characteristics,” Nispel said.

Initiates Overweight rating and $191 price target. 

My take: Last time I heard from KeyBank was May 2018, when Andy Hargreaves was still covering the stock with a Sector Weight rating and a soggy pre-split $198 price target ($49.50 in post split dollars).

12 Comments

  1. Fred Stein said:
    Like every thing Brandon says. And especially that he highlights ROIC.

    Apple beats many other financial metrics like this (eg. super low R&D, SG&A, etc.) because they focus. People may complain about their no-frills employee policies, or why they don’t have a car or a foldable phone, but it is all part of the focus, the discipline, the values.

    3
    December 6, 2021
    • Alan Birnbaum said:
      “ Let’s go Brandon “ /s

      4
      December 6, 2021
  2. Jerry Doyle said:
    Apple is north of $4 as I write due to this coverage and overweight rating.

    0
    December 6, 2021
    • Robert Paul Leitao said:
      Jerry: That and a strong broad market advance is lifting the share price. It’s a good old fashioned green day on the Street. Personally, I like these kind of days.

      2
      December 6, 2021
  3. Fred Stein said:
    One of the keys to Apple’s high ROIC is they debate honestly, deeply many times as the go from idea through to launch. Many other orgs (in my limited experiences) lock onto a program (or leader) and cancel only when it’s obviously doomed, or worse they kill projects randomly in a downturn.

    Apple’s approach is not only improves ROIC, it improves morale. It’s OK to change, to start all over, to delay, when needed. It’s good for customers because Apple typically gets it right the first time. (well, butterfly…) And it’s grrreat for investors. It’s also great for suppliers who count on Apple to fund their CAPEX to push their technology to global leadership.

    0
    December 6, 2021
  4. Robert Paul Leitao said:
    Apple is expensive by historical valuations? Maybe if one believes Apple is “only” a hardware company. I wish analysts would place almost as much attention on Apple’s services segment as they do “every whisper from the east” about supply challenges and so-called “channel decks.” They might discover the services segment is more than the App Store and the opportunities are huge. Mr. Nispel is at least making the effort.

    4
    December 6, 2021
  5. bas flik said:
    since covid multiples increased. not only apple’s. its inflation. no production of real goods by lockdowns yet governments pumped a lot of money into the markets to compensate their voters. this will cause inflation. classic example. thats why you have to be in apple. i feel sorry for everyone without AAPL shares.

    0
    December 6, 2021
  6. Bart Yee said:
    Hargreaves’ (the investment analyst vs the academic) LinkedIn profile lists his working career as including Pacific Crest Securities from 2003-2020, Sands Capital as a consultant, 2020, and interestingly, VP, Finance and Investor Relations at DoorDash since August 2020. So maybe Hargreaves is out of the general analyst biz.

    0
    December 6, 2021
  7. Ken Cheng said:
    Whenever I see Apple and ROIC in the same sentence, it reminds me of that “analyst” who, years ago, downgraded Apple based upon a predicted decline in ROIC. Was that during PED2.0, or earlier?

    0
    December 6, 2021

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