AAPL: Forget the iPhone—Services Will Drive the Next Phase of Growth

Key Points

• There's a growing argument that Apple's Services segment is significantly undervalued by the market and could by itself add as much as $13 to the company's share price.
• The segment's margins alone, at more than 70%, make it a compelling pillar in the bull's long-term thesis for the stock.
• Tigress Financial, Wedbush, and TD Cowen have all issued or reiterated bullish price targets this month, ranging up to $400, suggesting Wall Street is starting to connect the dots.

Shares of Apple Inc NASDAQ: AAPL have been on an impressive run in recent weeks, breaking through $300 for the first time last week. It means they're now up more than 20% since the start of April, finally rallying after months of range-bound trading.

The broader bull case that has fuelled this move has been well documented—a blowout earnings report, double-digit revenue growth, a massive $100 billion buyback, and a market that has firmly shifted back into risk-on mode.

What's received considerably less attention, though, is the argument that Apple may still be significantly undervalued in one very specific part of its business. A fresh note from Evercore ISI last week argued that the company's Services segment, which generated nearly $31 billion in revenue in its most recent quarter, is being priced by the market as if it were a hardware business.

The analysts believe that if it were valued more appropriately, as a high-margin, recurring-revenue software operation, it could add as much as $13 per share to Apple's stock price on its own. Considering Apple is currently selling record numbers of its iconic iPhone, that's an interesting take worth taking seriously.

Why Services Is Becoming Impossible to Ignore

The core of Evercore's argument isn't complicated, and that's part of what makes it so compelling. According to analyst Amit Daryanani, Apple's Services division, which covers the App Store, Apple Music, iCloud, Apple TV+, Apple Pay, and a growing suite of subscription products, isn't growing like a hardware business; it's growing like a software one.

More importantly, the margin profile tells a very different story from the iPhone business. Services carries dramatically higher gross margins than hardware, meaning every incremental dollar of Services revenue benefits the bottom line far more than a dollar of iPhone revenue ever could.

That distinction matters enormously when modeling what Apple's earnings could look like three to five years from now, as Services becomes an increasingly dominant share of the overall revenue mix. The company's installed base of active devices provides a remarkably durable foundation for that continued growth, and it feels as if Apple has barely scratched the surface of what it could monetize from that ecosystem.

Wall Street Is Starting to Connect the Dots

The bullish take from Evercore ISI didn't exactly arrive in a vacuum either. Last week, Tigress Financial reiterated its Strong Buy rating on Apple stock and raised its price target to $375, implying around 25% additional upside from current levels.

That stance echoes similarly bullish calls from TD Cowen and Wedbush this month, too, the latter of which has set an eye-catching $400 price target. The fact that these targets are clustering well above $300 at a time when the stock is only just reaching that level signals that the smartest money on Wall Street isn't treating $300 as a ceiling, but rather as a waypoint.

Underscoring all of this is WWDC, Apple's annual developer conference, which is happening next month and could serve as a significant near-term catalyst. If Apple uses the event to double down on its AI and Services roadmap, it would give the market a concrete reason to back up the bullish analyst calls.

The Valuation Concern Is Real

At the same time, none of this means the stock is without risk, and investors should think clearly about what they're paying for. Apple's current price-to-earnings (P/E) ratio is around 36, one of its highest in the past decade.

The Services-is-a-sleeping-giant thesis is compelling, but it only holds up if the segment continues to grow at double-digit rates. If macro headwinds start hurting consumer spending on subscriptions, or if equities in general take on a risk-off sentiment, the premium on Apple stock would be much harder to justify.

There's also the straightforward observation that the stock has already gained significantly in recent weeks. Investors getting involved at $300 aren't exactly getting in on the ground floor of the rally, and some near-term profit-taking following such a strong run isn't an unreasonable concern. The stock mightn't look technically overbought right now, but it's definitely edging towards that territory.

The real question for investors right now isn't whether Apple is a great business. That's not in dispute. It's whether the market is correctly valuing it given its full potential. If the Services argument gains broader traction in the coming weeks, the current price might look like a bargain in hindsight, which is exactly what the bulls are counting on.