Needham raises Apple price target to $450 on wearables, tied for highest forecast on Wall Street

Published Wed, Jul 15 20209:21 AM EDT

(This story is for CNBC Pro subscribers only.) Apple's services and wearables revenue can drive the stock higher, according to Needham analyst Laura Martin. The Wall Street firm — which has a buy rating on Apple — raised its 12-month price target on the stock to $450 per share from $350 per share on Wednesday, helping to send shares of the iPhone-maker up 2% in premarket trading. Needham's new target is tied for the highest on Wall Street, equal to Dan Ives from Wedbush, according to TipRanks. The $450 per share target implies a more than 15% rally from Apple's current levels. "We believe AAPL is driving its valuation multiple expansion in 3 ways: a) diversifying hardware on-ramps into AAPL's ecosystem through add-on products like watches, iPads, AirPods, Home Speakers, MACs, iPhones, etc; b) driving 'ecosystem lock-in' (ie, lowering churn) by adding utilities such as Apple Pay, Apple Care, Family Plan pricing, etc. and c) maximizing revenue per AAPL user through adding subscription products such as Arcade, News, Music, TV+, Cloud, etc.," Needham's Martin wrote. "All of these execution decisions elongate time spent inside the AAPL ecosystem plus maximizes revenue/ user and [long term value], which deserves a higher valuation multiple as risk falls, in our view," Martin added. Shares of the Tim Cook-led technology giant have soared more than 30% in 2020, despite the coronavirus crisis. Apple, alongside the rest of Big Tech, have led stocks out of the depths of the pandemic market rout. Martin said Apple's share price will continue to move higher thanks to Apple's dependable and growing services and wearables businesses, which accompany Apple's longstanding iPhone sales. "The bulk of AAPL's [long term value] is attributable to Services revenue (a recurring and high margin revenue stream) plus Ancillary product sales (ie, non-iPhone)," said Martin. Apple's platform aggregates 950 million of the wealthiest consumer globally, said Needham. IPhones are a huge aspect of Apple's revenue but with a 4-year replacement cycle for the iPhone, the technology company had to come up with other ways to generate revenue through other products and services. The firm said Apple's share price is growing and its churn rate is falling due to the company's ancillary product –AirPods, AppleWatches, Ipads and MacBooks — sales growth. Apple has stated that they can not keep up with strong demand for AirPods and Watches, Martin noted. Plus, the services revenue, which includes Apple Pay, Apple Music, iTunes and the App Store, has grown from $44 per user in 2018 to $55 per user in 2019. "For the 6 months ended 6/28/20, Services (at $26B) and Ancillary Products (at $39B) together added 80% to AAPL's iPhone revenue stand-alone, and more than doubled AAPL's iPhone revenue in the latest 3 months, according to AAPL's 10Q," add Martin. Apple will report its fiscal third quarter earnings on July 30. Martin estimates earnings per share of $2.25, which is well above consensus estimates of $2 per share, according to FactSet. Apple is known for its big pile of net cash and the technology darling regularly buys up its own shares. Martin said Apple's consistent share repurchase programs and rising dividend represent a form of downside protection for investors. Apple won a landmark court case against the European Commission over a dispute concerning nearly $15 billion in Irish taxes on Wednesday, which also helped boost Apple shares in the premarket. Martin said that Apple has little risk regarding U.S. and EU regulators on privacy issues. "Since AAPL makes virtually no money from advertising, it is well ahead of peers (our view) in offering its 950mm customers privacy options that turn off data sharing and data tracking unless their customer gives explicit consent to allow these," said Martin. Martin said Apple is the best-positioned to navigate regulators among all the so-called FANG stocks. — with reporting from CNBC's Michael Bloom.

People wearing face masks look at a cellphone outside an Apple store during a May Day holiday in Shanghai on May 1, 2020.

Hector Retamal | AFP | Getty Images

(This story is for CNBC Pro subscribers only.)

Apple's services and wearables revenue can drive the stock higher, according to Needham analyst Laura Martin.

The Wall Street firm — which has a buy rating on Apple — raised its 12-month price target on the stock to $450 per share from $350 per share on Wednesday, helping to send shares of the iPhone-maker up 2% in premarket trading.