The Ratings Game: Apple’s stock jumps after KeyBanc upgrade to buy rating

Shares of Apple Inc. jumped in early trade Monday, after the technology giant was upgraded at KeyBanc Capital, which said an aggressive move to a more “subscription-like” strategy can offset stagnating iPhone sales growth.

Analyst Andy Hargreaves raised his rating on Apple to overweight, the equivalent of buy, after being at sector weight for the past 4 1/2 months. He set a base-case price target of $187, which is 19% above Friday’s closing price of $156.99.

The stock

AAPL, +0.63%

 rallied 0.8% in premarket trade, putting it on track to open at a four-week high. It was trading 3.5% below the Sept. 1 record close of $164.05.

Hargreaves downgraded Apple in June, on concerns over a lack of growth in iPhone unit sales. He said he believes downside risk is limited, given Apple’s ability to exercise pricing power. Read more about Hargreaves previous concerns.

“While we remain somewhat pessimistic around multicycle iPhone unit growth, Apple’s expanded market segmentation strategy seems likely to drive average gross profit per user above out previous expectations,” Hargreaves wrote in a note to clients. “The potential for Apple to exercise greater pricing power, along with further App Store growth, supports the view of the company as a franchise with subscription-like qualities rather than a regular hardware business.”

Hargreaves said Apple’s most “inelastic” customers are likely to be the ones who look to purchase the iPhone X first, which he believes will create a favorable initial mix of higher-priced iPhone X sales that should please investors over at least the next few quarters.

That should help keep market valuations above historical averages, which raises his “bear-case” target for the stock by 24% to $136. His bull-case target is $227.

Many Wall Street analysts have expressed concerns since Apple’s product launch event in September, over reports of production delays and that the later-than-expected release of the iPhone X would cause near-term unit sales to miss previous projections. But the analyst community remains mostly bullish, with many citing an expected increase in average selling prices.

Don’t miss: Apple’s ‘short-term pain’ sets stock up for long-term gain.

See also: Apple’s ‘disappointing’ iPhone X could mean customers will keep clinging to older phones.

The average rating of the 36 analysts surveyed by FactSet is the equivalent of buy, and the average price target of $178.19 is 13.5% above Friday’s close.

Apple’s stock has rallied 5.3% over the past three months, while the tech-heavy Nasdaq-100 Index

NDX, +0.37%

has gained 4.4% and the Dow Jones Industrial Average

DJIA, +0.13%

has climbed 5.7%.