Goldman makes a big call on Apple that jibes perfectly with our long-term outlook

Published Mon, Mar 6 20233:01 PM ESTUpdated Wed, Mar 8 20232:20 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Goldman Sachs is its telling clients to buy Apple (AAPL) for the first time in years, making a compelling case for the iPhone maker that aligns closely with the Club's long-term outlook. The growth of Apple's services revenue in recent years has fueled our enduring investment mantra: Own Apple, don't trade it. "We are Buy rated on AAPL as we believe that the market's focus on slower product revenue growth masks the strength of the Apple ecosystem and associated revenue durability & visibility," Goldman's new Apple analyst Michael Ng wrote in a note Sunday. The analyst has a 12-month price target of $199 per share, representing an upside of nearly 32% from the stock's Friday close at $151.03. It is the first time since 2017 that Goldman has had a buy rating on Apple, reports Bloomberg. It follows a prolonged period of neutral designations and a 12-month sell recommendation — from April 2020 to April 2021 — under former analyst Rod Hall, who initiated neutral coverage of Apple in a Feb. 6, 2018, note . Apple shares rose 270.5% between Feb. 6, 2018 and Friday's close, far outpacing the S & P 500's roughly 50% advance over that period. The index's technology hardware and equipment industry group, which includes Apple, climbed a more robust 177.2% over that same roughly five-year stretch. Over the 12 months in which Goldman had a sell on Apple shares, the stock climbed about 89% . AAPL .SPX mountain 2018-02-05 Apple (AAPL) performance since Feb. 1, 2018 In Goldman's note Sunday, the firm struck a bullish tone on Apple's services revenue opportunities made possible by the company's installed base of 1.1 billion active iPhone users. Overall, Apple has more than 2 billion active devices, the company said in February, up from 1.8 billion in January 2022. "The installed base growth, secular growth in services, and new product innovation should more than offset cyclical headwinds to product revenue," such as longer device replacement cycles, Goldman wrote. The firm expects most of Apple's gross-profit growth to come from services, reaching 40% of gross profits by fiscal 2027. That compares with 33% in fiscal 2022, which concluded in September, and just 20% in fiscal 2017. Goldman argued the company's increasing services revenue justifies the stock's elevated valuation — about 24 times forward earnings — compared with its three-year, pre-Covid average of 16 times forward earnings. The Club agrees, as we've long cheered Apple's services push because that kind of revenue is more stable and predictable than lumpy hardware sales. Investors value predictability in earnings and generally are willing to pay a premium for it. The Club's take We welcome Goldman Sachs to our side of the Apple debate — we currently have a 1 rating on shares, meaning we'd buy more at current levels. In particular, we appreciate the analyst's conviction in the company's services growth, which includes the App Store and Apple Music. It's been a big part of our thesis for years and is ultimately rooted in the power of Apple's brand ecosystem and customer loyalty. As that base of active device users expands, the number of people who will pay for additional Apple services grows alongside it. Put it all together, and it's why Jim Cramer has preached for many years that Apple is a stock to own for the long term, not one to trade between iPhone cycles or dump when the short-term economic outlook turns murky. Of course, some times are better than others for the stock price, but even in those periods of struggle, such as 2022 when shares fell 26.8%, Apple pays a steady dividend and buys back billions worth of shares — increasing our percentage of ownership of the company at no extra cost to us. Our belief that Apple is a best-of-breed company with a strong competitive moat has allowed us to stay invested and not be scared out of the stock by analyst downgrades or negative headlines, like the iPhone production challenges experienced in the fall. We pay attention closely to developments that could shake our long-term outlook. So far, we haven't seen any. Apple remains a stock to own and not trade. (Jim Cramer's Charitable Trust is long AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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