Apple's share price could see a 43 percent rise over the next 12 months as investors shift their focus on the amount of iPhones the company is selling to the number of services it is getting users to pay for, Goldman Sachs said in a note on Wednesday.
The U.S. investment bank has put a $163 price target on Apple's stock, up from Tuesday's close price of $113.69 and added it to its "conviction buy list".
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Goldman says Apple currently trades like a "hardware stock" at an 11 times price-to-earnings ratio (P/E), but with the company introducing services such as Apple Music, it will become more akin to Google or Facebook.
"Apple's multiple embodies the scars from prior fallen giants in hardware (Motorola, Nokia, BlackBerry, and HP, to name a few). However, we think Apple's business model has less in common with traditional hardware companies, and more in common with companies that monetize mobile users through content and services," Goldman Sachs said in a note.
"In addition, the recurring nature of Apple's relationship with a customer base that consumes content and services exclusively through Apple's hardware has similarities to service providers such as AT&T or Comcast; these similarities are becoming more pronounced with Apple's new installment plan model for the iPhone, and its expected launch of a live TV service."
Apple's stock took a hit earlier this year amid concerns that iPhone growth was slowing. While Goldman agrees, it estimates Apple will still have an install base of 700 million in 2017, up from 500 million currently. The investment bank also notes that it is user base is very loyal and spend much more than Google's Android users. This year, Apple will generate $467 in revenues per iPhone user, above Google's $44 and Facebook $11, Goldman said.
But Apple is still trading at a discount, a view that is likely to change as the idea of "Apple-as-a-service" emerges.
Apple recently launched Apple Music, which costs $9.99 a month, and is rumored to launch an on-demand TV product next year which Goldman said could be around $40 a month. Given the number of services being launched by Apple, the average revenue per user (ARPU) could be as much as $150.
"We calculate a current ARPU of $42/mo per iPhone user, pro rata for the current adoption rates of Mac, iPad, Watch, and services. The theoretical ARPU (assuming every iPhone user has all other Apple hardware products and services) is $153/mo, implying significant growth potential as the adoption of Apple hardware and services increases within the user base," Goldman noted.
And this will be the driver of Apple's share price over the next year.
"We think that view will start to shift in 2016 as Apple's revenues become increasingly sticky and recurring with the launch of installment plans and a TV service, and we would use the near-term concerns over a y-o-y (year-over-year) unit decline as very attractive buying opportunity for the re-rating of Apple from a hardware stock (11X P/E) to a content and services platform (15X P/E)," Goldman's analysts wrote.