Wedbush's Daniel Ives is Optimistic for the Apple Services Industry

Daniel Ives wants you to know that he is still optimistic about Apple.

But even his prospects on the iPhone maker are not as optimistic today as they were a few weeks ago.

In a research note released on Wednesday, Ives, financial analyst for Wedbush and long-time bull of Apple's stock, lowered his company's stock price target from $ 310 to $ 275 and reduced his earnings forecast for quarter and current year. The updates reflect reports that the company's iPhones sales have been below expectations and its expectations may not improve any time soon.

Nevertheless, he remains loyal to the company, maintaining his "outperform" rating for his shares and trying to reassure shareholders made nervous by the recent fall in Apple's shares.

"The key question we are constantly getting from investors is this: do you remain optimistic about the name or do you throw sponge on the title until the dust disappears?" Ives said in the note. "It's a good and good question."

In his opinion, the sale has only made Apple more attractive.

"Apple is still one of our big names in technology in view of 2019 despite last month's Cupertino horror show," he said.

Apple's action is in free fall since its report on the results

The tech giant is excited since he announced his latest earnings report earlier this month. Although the company's sales and earnings exceeded expectations, its iPhones sales were below expectations and its holiday results could be lower than analysts' forecasts. Even worse, he announced that he would no longer report the number of iPhones sold each quarter, fueling the fear of wanting to conceal an expected drop in sales. These fears have since been amplified with reports of low demand for the company's latest phones.

Daniel Ives, Analyst at Wedbush
CNBC / YouTube

In addition to all this, President Trump said this week that Apple could be taxed on the iPhone and its other products made in China.

Since November 1, when he released a profit, Apple's share fell 18%. As a result of this decline, the company's market capitalization fell well below the $ 1 trillion mark, even just short of Microsoft's.

Read it:Microsoft's surprising return on Apple results from two new CEOs with dramatically different game plans

All the bad news from the company and his entourage was a "perfect storm" that reinforced the pessimistic – or unhealthy – case of Apple's shares, Ives said. These bears argued that Apple was a mature company and that, as such, it should trade at a lower multiple of earnings than it had in the past, while She was experiencing rapid growth.

"A lot of these bears have come out of their caves after hibernation, claiming that the iPhone upgrade cycle will continue to slow down and that compression will be on the horizon," he said. declared Ives.

IPhone sales were a "disappointment"

Apple is partly responsible for the sale, he said. Sales of the latest iPhone have been an "obvious disappointment", and the company must rethink its pricing strategy and design of its next phones, he said. In addition, he wasted the way he communicated his decision to stop providing iPhone sales units, he said.

"It's extremely frustrating and confusing how Apple communicated the" metric change, "said Ives.

Nevertheless, those who focus on the bearish case miss some important trends, he said. While Apple's rising iPhone prices may have weighed on sales, this decision has resulted in its revenue being maintained and will likely continue to do so.

Although the company's decision to stop declaring iPhone unit sales was disappointing, the company had a legitimate reason for doing so, Ives said. Apple is no longer just a hardware company. Its service business – which includes both the AppleCare warranty and subscription offerings such as Apple Music and iCloud storage – is now the second largest segment and one of its fastest growing. The company's revenues depend not only on the number of iPhones sold, but also on the number of additional services for which it convinces customers to enroll.

"Underlying goal of Apple [in discontinuing reporting the unit-sales numbers] is to make sure that the street starts to value all of the commerce as the first service company with a hardware / iPhone purchase, "said Ives.

Apple becomes a service company

The service industry has huge potential, Ives said, and that's ultimately what keeps it bullish on Apple. The company had sales of more than $ 37 billion in its last fiscal year, which ended in September. It should easily reach $ 50 billion in annual sales by 2020, Ives said.

Even better for Apple and its investors, gross margins in this segment – which are the difference between the price a company charges for its products and services and the direct costs of manufacturing and supplying these products and services – are about the same. double that of hardware sales. For example, if Apple continues to receive a greater share of its service revenue than the sale of phones and computers, it should start to earn even better health benefits.

Apple's service revenue grew by 24% last year and, according to Ives, it should continue to grow at least 20% per annum in the near future. Because of this growth and the revenue he's already generating, he thinks the services sector alone is worth $ 400 billion to $ 450 billion. In comparison, Apple's global market capitalization at market close on Wednesday was $ 859 billion.

"The service sector is the backbone of Apple's future," said Ives. He continued, "Now it's Cook and [Apple] navigate through this period of White Knuckle and prove that Apple's ability to monetize its billion [-plus] the devices sold to date and the unprecedented installed base is still on the horizon and not in the rearview mirror. "

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