Needham raises AAPL target to $450 on Wearables and Services strengths

In a note to investors seen by AppleInsider, Needham analyst Laura Martin writes that Apple is diversifying its hardware "on-ramps" through new products; driving ecosystem "lock-in" through utilities such as Apple Pay and AppleCare; and maximizing revenuer per user with its subscription services like Apple Music and iCloud.

All of those factors, according to Martin, "elongate time spent inside the AAPL ecosystem" and reduce the company's churn rate. They also maximize revenue, users and loan-to-value (LTV) ratios.

Wearables — like AirPods and Apple Watch — and Services both play a major role in the bank's price target bump. On LTV, for example, Martin sees a particular upside in the form of both Services and Wearables enhancing Apple's ecosystem "lock-in." That ultimately drives revenue per user, she adds.

Needham is calculating its LTV per unique user based on the assumption that iPhone sales represent $2,400 of revenue at $1 gross margin over 11 years. Non-iPhone product sales and Services add $2,100 and $800 in revenue per year, respectively. The investment bank estimates that Apple has 950 million unique users.

Additionally, Apple's overall average selling price (ASP) indicates that its 950 million unique users are among the wealthiest consumers globally. That implies "far more revenue upside than AAPL's current products and services capture."

The company's consumers may also skew "young and valuable," at least for certain businesses. Martin says that the highest Apple TV+ adoption has been by Gen Z and Millennials with 11% and 10% of the subscriber count, respectively.

As far as Apple's privacy commitments, Martin says that the company is "on the correct side" of privacy regulations. The analyst cites factors such as Apple's lack of advertising-fed revenue and the company's anti-tracking measures.

Apple's strong balance sheet, free cash flow and its share repurchasing programs all help to moderate risk for investors, Martin adds.

Based on all of these factors, Martin has raised Needham's AAPL price target to $450, up from $350 previously. That's primarily based on a discounted cash flow (DCF) valuation method using a 15% cash tax rate; a 6.9% weighted average cost of capital; and a long-term nominal GDP growth rate of 2%.

It also embeds a 10-year operating income before depreciation and amortization (OIBDA) rate of 5% annually and a 20.3x multiple of forward year OIBDA. Other forms of calculations include a 5.3x enterprise value-to-revenue (EV/Revenue) multiple, a 16.6x EV/OIBDA and a price-to-earnings multiple of 25.5x.

Shares of AAPL were trading at $387.97 on the NASDAQ Wednesday, down 0.067% in intra-day trading. AAPL is up 5% over the past five days, however, and the company's stocks rallied Wednesday morning to reach a high of $396.98 before falling to their current price.