The reveal of the Apple SE may have been underwhelming, but don’t underestimate the average Apple buyer: they are wealthy, loyal, and big spenders, wrote Credit Suisse analyst—an they are likely to pay more for Apple’s next big driver: services.
In a glowing Monday note, a team of analysts led by Kulbinder Garcha added Apple to Credit Suisse’s U.S. focus list, a group of stocks that representing the firm’s favorite buys. Analysts also upped the company’s price target to $150 from $140, reiterating the stock as outperform.
That pushed shares up 1.34% in mid-trading Monday.
“We performed a deep dive on Apple’s Services offerings and conclude that the market may be underestimating the (gross profit) contribution from services, but more important, underappreciates its growth potential and the annuity-type business it drives in terms of retention and replacement across the business,” they wrote.
Apple services, which includes iCloud, Apple Music, and Apple Pay, are expected to generate profits of $33.7 billion by 2020, representing about a third of total gross profit, Credit Suisse wrote. Currently they represent about 15%.
The banking giant has a positive outlook on Apple’s growth largely due to it’s loyal and affluent customer base. Credit Suisse noted that the Apple touted over 1 billion active devices—while just over half of those users, 600 million, are highly affluent and account for 66% of all mobile commerce. They spend about seven times more than Android users, and are also more likely to stick with the brand, with Credit Suisse estimating a 90% retention rate after buying products such as iPhones.
Already, profits from services have ballooned from $3.2 billion in 2010 to $14.5 billion in 2015, driven by a high number of installations.
Credit Suisse analysts also say Apple’s loyal user base could drive gross profits stemming from annuity-based payments, such as subscriptions and installment plans, up to 55% of total gross profit in five years.