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Apple analysts feeling optimistic ahead of results this week

One analyst believes the company's iPhone business provides a stable foundation to build a high margin services business
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Apple analysts optimistic ahead of results for the company on November 1.

Apple Inc (NASDAQ:AAPL) analysts are feeling optimistic about the fourth quarter results of the iPhone maker which will be released after the market closes on Thursday, although one  believes the focus will be on the guidance for the December quarter encompassing the year-end holiday season.

"The results for the quarter take a back seat to the main event which will be the company’s highly anticipated guidance for the upcoming December quarter and thus represents a key barometer of health for the all-important XS/XR iPhone demand cycle," Wedbush analysts Dan Ives and Strecker Backe said in a research note to clients.

Jefferies analyst Timothy O'Shea said in a separate note that Apple's iPhone business provides a stable foundation to build a massive, high margin services business.

"We believe AAPL's stable iPhone business will serve as the foundation upon which it can build a massive, recurring and high margin Services business," O'Shea said in a note.

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"We continue to believe XR will be a linchpin around Cupertino’s success in further penetrating the China consumer market over the next year with our estimates that roughly 60 million to 70 million iPhones in this key region are in the window of opportunity to upgrade," the Wedbush note said.

China is the second biggest iPhone market of Apple behind the US.  

The Wedbush analysts reiterated their rating of Outperform for the stock and a price target of $310.

O'Shea said Apple's services business could make up 25% of its revenue by fiscal year 2020, as well as 40% of the company's gross profit.

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"Applying a higher multiple compared to the lower margin hardware business, we see a significant opportunity for investors as Services alone could be worth $111 to $177 per share by that time," O'Shea said. "Services growth will be led by App Store and Apple Music, and we see an opportunity to introduce new services over time."

Ives and Backe wrote "...we believe Apple’s earnings and more importantly guidance around initial iPhone demand heading into year-end and its trajectory for 2019 will be a positive catalyst" for Apple and the tech sector as a whole.

Apple shares were trading up 0.3% at $216.96 by midsession on Monday.

Reporting by Rene Pastor, contactable on [email protected]

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