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Analysts urge long-term view of Apple ahead of fiscal Q3 earnings

Despite muted expectations for Apple Inc.'s just-ended fiscal third quarter, analysts remain optimistic that strong demand for its devices and services will overcome broad-market uncertainties by 2021.

Apple faced significant production delays and retail closings as a result of the coronavirus pandemic this year, sparking some investor concerns about the company's upcoming July 30 earnings announcement. But analysts say anticipation for the launch of a 5G iPhone this fall and strength in Apple's service business should carry the tech company to new highs later this year and into the next.

In an interview with S&P Global Market Intelligence, Granite Investment Advisors partner and portfolio manager Timothy Lesko said he expects Apple's services segment to deliver the strongest results for the company in the just-ended quarter, as pandemic-related supply-chain difficulties have weighed on recent iPhone sales.

IPhone sales revenue in the March quarter totaled $28.96 billion, down 6.7% year over year. Company executives on an April earnings call warned that iPhone net sales could worsen during the June quarter.

But management noted that Apple's services business, which includes the App Store, Apple Music and video services, has performed well amid the outbreak so far, and they expect that momentum to continue.

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Net sales in Apple's services business came to $13.35 billion for the March quarter, up from $11.45 billion a year ago. Services accounted for 22.9% of Apple's total net sales in the March quarter, up from 13.8% in the December period. The company typically enjoys a bump in hardware sales in the December quarter following its fall product releases and amid holiday shopping.

Overall, Lesko said he has muted expectations for Apple's performance in the June quarter, calling the period a "throw-away quarter" for many companies due to pandemic disruption. However, he said the big tech sector overall is stronger than would be expected in a typical recession, with growing cash piles to lean into as needed.

Needham analyst Laura Martin is similarly optimistic around Apple's long-term potential. The analyst in a recent report upped her price target on Apple stock to $450 from $350, noting the company's locked-in demand from its closed ecosystem should reduce customer churn.

"The right way to think about Apple's valuation, pricing power, competitive advantage period and barriers to entry is through the lens of its ecosystem dominance among the wealthiest smartphone owners in the world," she wrote.

Other analysts are betting on Apple's expected release of a 5G iPhone this fall to fuel the company's next phase of growth.

Loup Ventures managing partner Gene Munster in a July 10 note predicted Apple will be the best performing company among the big tech FAANG group this year. FAANG companies include Facebook Inc., Apple, Inc., Netflix Inc. and Alphabet Inc.'s Google LLC unit.

Munster expects Apple to benefit from the expected launch of new iPhone models this fall and investor excitement for the broader rollout of next-generation 5G wireless services in the U.S.

When fully implemented, 5G is set to offer download speeds many times faster than the current 4G LTE wireless networks.

Similarly, Wedbush Securities analyst Daniel Ives in a July 13 report bumped up his price target on Apple stock to $450 from $425. He predicts Apple's 5G tailwinds and services momentum should propel the company to reach a $2 trillion valuation in 2021.

Apple became the first publicly traded U.S. company to hit $1 trillion in market capitalization in 2018. It is currently valued at about $1.6 trillion.

Ives expects Apple to launch four new iPhone models this fall with a mix of 4G and 5G capabilities. The phones could potentially retail at under $1,000 despite the addition of 5G, he said.

Although COVID-19 has created myriad challenges for Apple, D.A. Davidson analyst Tom Forte expects the pandemic to spur demand for some of the slower-growing products in its portfolio, such as laptops and tablets, as more people work and learn remotely.

"We look for comments [on Apple's July 30 earnings call] surrounding the total impact on its business, pipeline and how the coronavirus outbreak may affect the future," Forte wrote in a note.

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