JP Morgan gives Apple a new buy rating due to its transformation into a services company

  • J.P. Morgan initiates coverage of Apple shares with an overweight rating, predicting strong growth for the smartphone maker's services offerings.
  • Apple is “transforming from a hardware company to a services company faster than investors had expected, which is driving financial and valuation upside,” the firm's analyst, Samik Chatterjee, says.
Apple CEO Tim Cook speaks at Apple's Worldwide Developer Conference (WWDC) at the San Jose Convention Center in San Jose, California on Monday, June 4, 2018.
Josh Edelson | AFP | Getty Images
Apple CEO Tim Cook speaks at Apple's Worldwide Developer Conference (WWDC) at the San Jose Convention Center in San Jose, California on Monday, June 4, 2018.

Apple shares will keep rising even after its big gains this year, according to J.P. Morgan.

The firm initiated coverage of Apple shares with an overweight rating, predicting strong growth for the smartphone maker's services business.

Apple is "transforming from a hardware company to a services company faster than investors had expected, which is driving financial and valuation upside," analyst Samik Chatterjee said in a note to clients Thursday entitled "Time for Apple Picking: Initiate OW on Compelling Services Transformation, Ripe Installed Base, Core Capital Deployment." "We expect increasing appreciation of acceleration in growth, along with greater visibility into earnings and cash flow with increasing mix of Services."

Apple shares closed up 2.1 percent Thursday.

The company's services business includes its App Store, Apple Music and Apple Pay offerings.

Chatterjee started his price target at $272 for Apple shares, representing 23 percent upside to Wednesday's close.

The analyst said Apple's services sales rose to 13 percent of its fiscal 2017 revenue versus 8 percent for fiscal 2012. He predicts the segment will rise to 20 percent of the company's sales by its fiscal 2021.

Chatterjee is the new analyst covering Apple for J.P. Morgan. The firm last covered the smartphone maker in October 2017.

Apple shares are significantly outperforming the market this year. The stock is up 30 percent year to date through Wednesday versus the S&P 500's 9 percent gain.

Last month Apple became the first publicly traded U.S. company to reach $1 trillion in market value.

— CNBC's Michael Bloom contributed to this story.

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