Apple (AAPL) makes smartphones, tablet devices, computers, and portable digital media players, and sells a variety of related software, services, and accessories. Our “Buy” rating reflects our view of AAPL’s ecosystem, high customer retention rates, and expanding addressable market, writes Angelo Zino, analyst at CFRA Research.

Despite macro uncertainty, we think AAPL’s premium valuation is warranted given stable FCF generation, aggressive capital allocation strategy, and management’s ability to execute. We forecast further upside to average selling prices in the coming years (e.g., foldable phones), while ongoing growth within the installed base should keep services expansion intact (e.g., advertising, gaming, and bundling).

Margins could offer upside ahead, on better mix and declining component prices. We like AAPL’s attractive pipeline (e.g., AR mixed reality headsets, Apple car, health care, and shift towards hardware as a service), while switcher rates remain high.

Apple (AAPL)

We forecast gross margin at 44% from FY 23 to FY 25, above FY 22’s 43% margin. We like services margins (71.0% in Dec-Q), which will likely support better mix, while pricing power should sustain hardware margins near current levels (36.7%). Our 12-month target of $220 is based on a P/E of 28x our CY 25 EPS estimate of $7.85, above peers.

We think an aging and growing installed base of +1 billion phones will allow AAPL to see growth and support greater penetration for services. Risks to our recommendation and target price include less success with product launches/innovations, longer-than-expected hardware replacement cycles, and regulatory scrutiny within its services business.

Recommended Action: Buy AAPL.

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