BofA raises Apple price target to $340, sees continued growth in iPhone installed base

On Wednesday, BofA Securities reiterated its buy rating on Apple shares and lifted his price target from $320 to $340, as it sees continued growth in the iPhone installed base (IB), as well as secondary market growth representing a large services opportunity. The Final Round panel discusses the bullish call.

Video Transcript

MYLES UDLAND: It's time now for our Call of the Day, and today, we are talking about Bank of America Global Research's latest call on shares of Apple. The firm is taking its price target up to $340 per share. That's up from $320. They're reiterating a buy rating on the stock.

And Seana Smith, this really comes down to how many people-- I mean, like, look, sell side analysts can't just write, like, a two sentence note, and say, here's the case. This has to be a very long detailed case. But it's basically like, a lot of people have iPhones and they're not really getting rid of them. That's-- that's it. That's the tweet.

SEANA SMITH: Yeah, and it goes back to what we've been talking about time and time again here on Yahoo Finance. Just the strength of Apple's ecosystem. And once you get into their ecosystem, you are likely to buy more of their products, you're likely to return and upgrade your products after a certain amount of times.

So this is something that Apple has been benefiting from now for years. So nothing really in this research note that's that interesting, but the one thing, Myles, that did stick out to me was just when they were talking about the install base driven monetization, it still has a runway. So they still have lots of room really to gain their paid subscribers.

At the end of their fiscal second quarter, Apple only had-- not only, that's still pretty good, about 550 million paid subscriptions across services on its platform. And they say, that they expect that to reach 600 million paid subscriptions before the end of the fiscal year 2020. But when they talk about the fact that it's on the basis of 1 and 1/2 billion devices, they still have a large room really to-- to kind of get a lot of those people to transition over to the subscription, that paid subscription. So that in turn, could mean big money for Apple down the road.

MYLES UDLAND: And you know, Melody, this note also addresses something that we've talked about for a number of years, which is things can't just be the same for Apple forever, right? I mean, there's always been a fear that they would be the next version of, name your formerly failed hardware maker, and this suggests that there's maybe a flattening of some of that. But the way that Apple offers a deeper, I guess, this is very corporate speak, connection with its users, right?

I mean, it has more of the ecosystem that ties you in other than just BBM. I think kind of continues to keep those fears off the table because that's been a talking point with Apple since, I'd say what? 2012, 2013? When Samsung really started kind of bucking its head with those new devices.

MELODY HAHM: Well, Myles, I think this proves that tech companies can be cyclical. That this can be a cyclical trade where we talk about hardware for a while. Then OK, let's-- let's humor the health care comment. Let's humor, you know, services of course, but those are all additive, right? If you don't have the phone, the services don't really matter.

The whole point is you have the product and that's why the halo effect occurs, as this note points out. And I'll never forget this anecdote that someone who went to HBS shared saying that, even thinking about the hottest class 20 years ago. It was about how Microsoft became the behemoth and Apple was the darling and the upstart.

And then several years ago, that switched, right? Where Apple and Steve Jobs' vision became the most popular class, and no one seemed to care about Microsoft anymore. But then look at today, right? Microsoft was able to kind of pull up its bootstraps, figure out a way to be competitive in the cloud space. And even if there isn't the same sort of kind of sex appeal surrounding the brand, that doesn't necessarily change the fact that a company can diversify and pivot.

I think if anything, this new services economy actually allows more space for that to happen. Where you don't actually need to be a one trick pony. Of course, in this current period of time, the iPhone is the portal to that entire world, but at the same time, I think there is this broader discussion where you can kind of have a portfolio of different things, even if the revenue generator will always be the iPhone.

And you know, this Call of the Day is actually the calls of many of the firms, right? I think over the last two days, Jefferies, Bank of America, and Deutsche Bank, all upgraded the stock. So this is not necessarily a contrarian view, as we have noted time and time again on the show.

DANIEL ROBERTS: Yeah, guys. I mean, nothing here seems new to me in any way. And in fact, there's no real new-- news peg for this upgrade except the same thinking that we've discussed for months and months, maybe over a year, that if and when the next iPhone comes, even if it's going to be delayed, which it sounds like it will due to coronavirus or maybe because 5G, you know, a lot of us had said anyway that we thought it wouldn't quite be widespread as quickly as the companies were telling us, but whenever that thing comes, whenever the next iPhone and 5G capable iPhone comes, the people who have iPhones are still going to want to upgrade it.

Even though the upgrade cycle slowed somewhat, and people are keeping their existing phone longer than before. And that was me. I mean, I held on to the 7 for far longer than I probably held on to any other previous iPhone because I didn't really see an urgent need to switch.

And then finally, recently, I got the 11 right before quarantine. And I'll admit, it's very good. I'm very happy with it. Now all that said, I do think the idea of the install base and that juicing the services is still a little overblown, because just because you have an iPhone as your device doesn't mean that you will opt into all of the premium add-on paid Apple services.

So you can still look elsewhere. Me, for example, I do Spotify, so I don't have any interest in Apple Music. I pay for a couple of streaming TV apps, but I don't pay for Apple TV Plus, and I'm not interested in it for now. It hasn't enticed me yet. So we talk a lot about the services, but it's not a given that those with an iPhone will opt in to all of the Apple services.

But you know, it is funny. I think Melody described it perfectly. Every few weeks or months, the cycle of the notes shifts from iPhone, iPhone, iPhone, iPhone, back to, oh, well, if you're not so bullish on iPhone, there's services, and there's health, and there's fitness tracking, and wearables. And then they come back to, well, if you don't like that argument so much, remember iPhone.

SEANA SMITH: Yeah, Dan, I know you and I have talked about this before, but time and time again, I mean, the next big test for Apple I think is going to be the launch of their new iPhones. There's been a lot of hype about it. The 5G, whether or not it's going to be delayed. How significant of a delay we could be expecting. But the big question is whether or not that's going to get so many people off the sidelines and really get them to upgrade their phones. I mean, you don't know much information, confirmed information about the price points of this. But if it is an extremely expensive phone, do you think Millennials specifically, or even looking at the older generation, Baby Boomers are going to care enough about 5G to handover $800, $900, $1,000 for a new phone? So I'm not that sure. And I think that we see time and time again these bullish calls coming out on Apple trying to pump up their services business. But when it comes down to it, it's really still all about the success of the iPhone. And when they come out with this new line in a couple of months, if it falls flat, that's going to be the major concern for Apple here in the short term.

DANIEL ROBERTS: Yeah, as I-- as I think I've made clear. I'm a Bear on the services argument. I'm a Bear on the wearables. I don't like the air pods, although Myles says, I'm a loser for not liking them. Now all that said, I think whether people will finally upgrade when there's a 5G iPhone depends on the word of mouth around 5G.

Are people going to say, once they've got one, or the advanced reviews, whoever gets them, they're going to say, wow, this is life changing. It's so much faster. Then sure, people will upgrade. And even if it isn't so, oh my god, it's life changing, I do think that there's going to be much more of an enticement than with previous models. I mean, I felt that the problem and the reason that the cycle kind of went stale is that, you know, I remember the time when every time there was a new iPhone and Jobs and then Cook would hold it up on stage, it was like, wow. It has three, four, five things that the last one didn't have.

But in the last couple of years, it's been like, every new iPhone version is the slightest incremental increase. Well, the camera's a little better now. Or well, the camera previously had three eye holes, now there's four. OK, great. Well, portrait mode. Well, but you could still sort of be like, I'm just-- I'm good. Mine works fine.

Now other than the planned obsolescence of the battery life, because we know that's a thing. The battery life keeps depleting. But all that said, I think once 5G comes, it's the first in a long while real hard enticement, oh, 5G. Well, I got to have the 5G phone.

MYLES UDLAND: I'm a little surprised that you think 5G will matter.

DANIEL ROBERTS: Well if it-- if it is what it's hyped to be.

MYLES UDLAND: Yes, yes, yes, yes, yes. We'll see. We shall see.