18 November 2015

Activism, News

There’s still plenty of room for growth.

It’s time to stop thinking of Apple as a hardware company and start thinking of it as a service company.

At least, that’s what Goldman Analyst Simona Jankowski and her team are telling clients as they add the stock to their “conviction buy” list and call for a price of $163 in the next 12 months.

“We expect that over the next year, the focus will shift from unit growth (which is slowing given a maturing smartphone market) to installed base monetization and recurring revenues (“Apple-as-a-Service”). Apple’s model has already tilted that way with its new iPhone 6s installment plans, and we see the upcoming TV service as a powerful next step.”

Due to Apple’s large and loyal customer base, the team argues that there is a “significant multi-year opportunity” for the tech giant to boost monetization. Jankowski’s team estimates that over 90 percent of those purchasing iPhones are repeat customers, which will make it much easier for Apple to become a service-like company, especially as it launches a TV service.

The timing might prove perfect for a foray into the TV space as well, with Goldman pointing towards acceleration in cord cutting as millennials are more apt to use what it refers to as “over-the-top media consumption,” and the skinny bundles such as Sling TV and Vue become more common.

“Theoretically, Apple could transition other products to installment plans as well, and charge customers a monthly bill that also includes its other services such as Apple TV and Music. We think a potential live TV service from Apple would be a key enabler of this transition to an “Apple-as-a-Service” business model.”

The shift to a service model could prove to dramatically increase Apple’s average revenue per user (ARPU). Jankowski estimates that Apple’s current ARPU would be $42 operating with a service business model.

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Goldman Sachs Apple Service Model

In the future, this could snowball into $153 per customer every month. The team doesn’t expect it to hit this in the near-term given that the majority of customers would not use all of its platforms, but they said they wanted to show this figure “for perspective on the multi-year upside available to the company, especially relative to investor concerns that it has reached saturation and is going ‘ex-growth.'”

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Goldman Sachs Apple Service Model

The team then puts it all together and argues that if you assume a $153 ARPU for the U.S. and $50 for the rest of the world, you arrive at a maximum revenue of $553 billion for 2017. To put that into perspective, consider that Apple’s revenue for fiscal year 2015 is $233 billion.

Basically, Goldman is saying that there is plenty of room for growth, even if hardware is slowing down.