Apple Doubles Down on Software and Services

Apple Inc. (AAPL), which became the first U.S. company to surpass $1 trillion in market value earlier this year, will sustain its rally thanks to its successful expansion into a number of high-growth businesses outside of its core iPhone segment.

(See also: Apple to Outperform on Next Gen iPhones, Despite Prices.)

Apple Shares to Gain 20%, Driven by Non-iPhone Businesses

In a note to clients on Thursday entitled "Time for Apple Picking: Initiate OW on Compelling Services Transformation, Ripe Installed Base, Core Capital Deployment," JPMorgan initiated coverage on Apple shares with an overweight rating, CNBC reports. 

Analyst Samik Chatterjee applauded the tech titan's swift move to rely more on its services business. The Cupertino, California-based company continues to generate a majority of its revenue from iPhone sales, yet has been doubling down on software and services to hedge against longer replacement cycles for its devices and a deceleration in the global smartphone space. With services like Apple Music, Apple Pay, and the App Store, the firm is able to generate recurring revenue streams from subscriptions, instead of being at the mercy of the iPhone life cycle.  

The global tech behemoth is "transforming from a hardware company to a services company faster than investors had expected, which is driving financial and valuation upside," says Chatterjee. "We expect increasing appreciation of acceleration in growth, along with greater visibility into earnings and cash flow with increasing mix of Services."

The analyst forecasts Apple's services business to account for 20% of the company's sales by fiscal 2021. Last fiscal year, Apple's service segment represented 13% of total sales, a jump from 8% in fiscal 2012. 

JPMorgan's 12-month price target of $272 for Apple shares implies a 21% upside from Thursday morning. With trading up 2.2% at $225.20, Apple stock reflects a 33.1% gain year-to-date (YTD), outperforming the S&P 500's 9.3% return and the Nasdaq Composite Index's 16.7% increase over the same period. 

(See also: Qualcomm Twists the Knife on Apple in Lawsuit over Intel.)

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