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- Apple stock still has a lot of upside that some investors may be underestimating, according to Morgan Stanley.
- Morgan Stanley said five under-the-radar catalysts could send Apple stock to its bull-case scenario of $230.
- The bullish target represents 53% upside and would catapult Apple to a near-$4 trillion valuation.
Apple stock turned heads when it reached a $3 trillion market valuation last year, but ever since then the stock has trended lower, with the iPhone maker nearly 20% off its all-time highs.
But Morgan Stanley believes not only will Apple reclaim its $3 trillion valuation milestone, but that it could surge as much as 53% from current levels to a near-$4 trillion level.
In a Friday note, Morgan Stanley analyst Erik Woodring bumped his price target to $180 from $175, and highlighted five under-the-radar catalysts that could send Apple stock to its bull-case scenario of $230.
"If we look beyond the near-term, we see a catalyst-rich event path over the next 12 months that is underappreciated by investors," Woodring wrote.
He is so confident that Morgan Stanley named Apple its top stock pick of 2023. These are the five Apple catalysts on Woodring's radar.
1. Pent-up iPhone demand
Since Apple sold 9% fewer smartphones in its fiscal 2023, Morgan Stanley estimates that iPhone replacement cycles will extend to 4.4 years by the end of 2023. That's an all-time record, and it means that demand for 10 to 30 million iPhones has been deferred this year.
"Given Apple's industry-leading retention rates, we expect a portion of these units to be recovered in FY24 as production normalizes, consumer hardware spending recovers, and a new iPhone model launch unlocks pent-up demand," Woodring said.
2. A re-acceleration in Services growth
A rebound in App store growth, easing foreign currency headwinds, and price increases across Apple Music, Apple TV+, and Apple One set up Apple's Services business for faster growth ahead.
3. Upside to Apple's gross margins
Technology insourcing, easing of logistic headwinds, and a positive shift to Services relative to hardware are helping boost margins.
"What is most underappreciated by investors today is just how strong Apple's underlying gross margins are when adjusting for FX headwinds," Woodring said, adding that there is about 150 basis points of average upside to the consensus gross margin forecast.
4. New product launch
Historically, new products have driven Apple's stock price higher, and the company is expected to launch the iPhone 15 later this year, along with a potential AR/VR headset.
"History shows that you want to own Apple stock 6-9 months ahead of key product launches," Woodring said.
5. A hardware subscription launch is worth $1 trillion
"What gets us most excited as an Apple analyst today is the business model transformation Apple is undergoing, shifting toward a model focused on installed base monetization rather than unit growth, which in our view, increasingly argues for a valuation more commensurate of a subscription-like business," Woodring said.
Apple's 1.2 billion user base spends an average of $32 per month on all of Apple's products and services combined, which is more than 50% below the average US cable bill.
"The potential launch of a hardware subscription service - rumored to launch as early as March/April 2023 - is the key catalyst that can not only help drive spend per user materially higher, but also help shift the market's perspective on valuation," Woodring said.