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Buy Apple’s stock because it’s more than just a hardware play, Citi says

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Apple Inc.’s stock won a new fan on Wall Street late Thursday as Citi Research analyst Atif Malik initiated coverage of it with a buy rating.

“We believe the Street is underestimating continued gross margin expansion,” he wrote in his note to clients, which was titled: “A Hardware Company That Thinks Like a Software Company.”

Malik is upbeat about Apple’s
AAPL,
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ability to expand margins by continuing to drive consumers toward more expensive devices and configurations. Plus, Apple boasts “resilient market share,” with gains against Android devices, and it’s poised to lower its own costs thanks to a move to design its own custom chips.

“Moreover, growing higher-margin services sales mix should help expand the overall corporate gross margins,” Malik continued, as he set a $240 price target on Apple shares, which closed Thursday at $189.59.

Read: Apple’s march toward a $3 trillion valuation, shown in one chart

He notes a compelling opportunity for Apple in India, where the company had perhaps only a 5% share of the market for smartphone shipments last calendar year. Now Apple has two physical stores in the country, which let consumers in the country “experience the Apple brand” and buy phones directly. The stores can also enhance Apple’s understanding of the market as it looks to boost its positioning.

The company stands to benefit as India’s middle and upper classes grow, Malik said. Those cohorts could grow their spending by six times come 2030, he wrote.

“Overall, there will be nearly $2 trillion of incremental spend on affordable, mid-priced offerings, in parallel with $2 trillion incremental spend led by consumer upgrading to premium offerings or adding new categories of consumption,” Malik said in a broad discussion of these groups’ spending power.

Apple can turn to its success in China as a playbook, given that the iPhone represented perhaps just 2% of smartphone shipments in that country during 2009. Now that portion stands at about 17%, Malik said.

Other emerging markets, including Mexico, Saudi Arabia, Turkey and the United Arab Emirates, offer opportunity as well.

Malik’s bullish view of Apple comes even as he isn’t expecting much from the Vision Pro headset that the company recently teased.

More from MarketWatch: Is Apple’s Vision Pro VR headset worth $3,499? Read this before shelling out.

“We don’t expect the headset to be a key driver to Apple’s total sales in the near term as it will only be available early 2024 and we expect only [150,000 to 200,000] units for the first couple of years,” Malik wrote.

Apple Vision Pro: How early adoption could stack up against the iPhone, Apple Watch and iPod

In other futuristic moves, he explored Apple’s options for the car market, noting that the company now faces the question of “when and to what extent” it wants to get involved in these sorts of efforts.

“We believe the best solution is for Apple to be integrated with auto makers’ user behavior and information much more deeply than its current Apple CarPlay system,” he wrote.

While Apple continues to shell out cash for dividends and stock buybacks, it still has room to play around, which is likely why the company is considering moving into markets with lower margins.

“Moreover, by 2025 we expect that the EV [electric-vehicle] total addressable market will be greater than the entire combined smartphone, PC, tablet and wearables market,” Malik said.

Don’t miss: The next catalyst for Tesla’s stock is around the corner

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