Growth in Apple's services business will hit 20% next year, boosted by its new Apple TV+ streaming service, Morgan Stanley analyst Katy Huberty predicted in a note distributed on Tuesday.
Apple TV+ is a streaming service that is launching in November and will cost $4.99 per month for access to a variety of original TV shows and movies bankrolled by Apple. Apple will bundle a free year of the service with the purchase of a new product such as an iPhone or iPad.
The predicted strength of Apple TV+, as well as Morgan Stanley's belief that iPhone sales will return "to growth as replacement cycles peak," is why Morgan Stanley raised its price target for Apple stock to $289 from $247, a 17% increase. It's currently the highest price target among 33 analysts covering Apple, according to FactSet.
Huberty is bullish on Apple TV+ growth, even if only a small fraction of people who pick up the free year end up paying to subscribe.
"With an attractive price point at $4.99/month, and wide initial distribution to the Apple installed base via the bundled free year offer, we estimate Apple TV+ can become a $9B revenue business with 136M paid subscribers by FY25, assuming just 1 in every 10 Apple user pays for the Service by FY25," Huberty wrote.
Apple TV+ enters a competitive market. Disney is preparing a streaming service launch just days after Apple, NBCUniversal plans its own service called Peacock, and AT&T's WarnerMedia will launch a service under the HBO brand name. Netflix is the current leader in the market with over 158 million subscribers around the world.
One standing issue is how Apple will account for the free year of Apple TV+. Analysts from Barclays and Goldman Sachs have previously outlined how they think the costs will be handled on Apple's books. Apple said in September: "We do not expect the introduction of Apple TV+, including the accounting treatment for the service, to have a material impact on our financial results."
Morgan Stanley's analysis lines up with Apple's statement.
"For Apple TV+ to have a more material impact to our near term estimates, we'd have to assume 1) Apple TV+ production costs are significantly higher at the launch of the Service, and/or 2) more users redeem the Apple 12 month free offer with the purchase of a device," Huberty wrote.
"With a growing list of catalysts, including accelerating Services growth and multiple expansion ahead of the 5G iPhone launch, and an attractive 8% total dividend + buyback yield, we continue to view Apple as our top pick into 2020," Huberty wrote.
CNBC's Michael Bloom contributed to this story.