As a standalone company, Apple's services business could be worth as much as $260B, Piper Jaffray s

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in AAPL Investors
Investment firm Piper Jaffray continues to believe that Apple's services business is vastly undervalued by Wall Street, as the company reiterated this week that services should be a larger focus for investors.




Analyst Gene Munster issued a note to investors on Wednesday noting that shares of Apple's chief rival, Google, trade at about about 19 times the company's projected calendar year 2017 operating revenue, excluding net cash.

Applying that same metric to Apple would imply a valuation of around $264 billion for the iPhone maker's services business, Munster said. That compares to a current market capitalization of around $590 billion with $160 billion in cash.

Munster said using Google as a comparison seems to him to be the most fair way to judge Apple's services business. But he acknowledged that the tight integration between Apple's hardware and software makes it a difficult comparison.

Even if investors were to take a "safe" approach and halve Google's projected calendar year 2017 multiple to 10 times, that would still place Apple's services business as being worth $139 billion, he said.

Munster noted earlier this week that Apple's services business grew profit margins by 60 percent in 2015. He expects that growth to continue as the company leverages its huge installed user base.

Apple itself has been placing a greater focus on its services business in recent earnings reports. And Munster believes that Apple's continued focus on it will resonate with investors --?eventually.

"Apple's current valuation seems to understate the value being created by the Services business, and we expect the awareness of this to grow over the next several quarters as Apple continues to give more detail on the segment," he said.

Piper Jaffray has maintained its "overweight" rating for shares of AAPL, with a price target of $172.
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Comments

  • Reply 1 of 24
    croprcropr Posts: 1,124member
    That a lot of BS.
    The main reason why the Apple service business is successful, is the iPhone (and to a lesser extend the other devices).  And for the record, there is nothing wrong with that.

    Without the iPhone ecosystem, the Apple service business would have a lot of difficulties to differentiate itself from the competition.
    Nobody would consider using iCloud: it has less functionality and is more expensive than Dropbox, OneDrive, Google Drive, ....  If the service business could stand on its own, there should millions of Android only users having a subscription for Apple Music.
    anantksundaramireland
  • Reply 2 of 24
    brucemcbrucemc Posts: 1,541member
    The point isn't that the business could exist on its own, but rather to try and determine a value for it.

    Given the amount of money that Apple returns to their shareholders each year, and with the cash generated each year, Apple's stock price is basically valued at the company not existing in 10 years (if you take the view that the current stock price is meant to reflect all expected future earnings).
    palominepatchythepiratenolamacguyradarthekatmonstrosity
  • Reply 3 of 24
    adrayvenadrayven Posts: 460member
    cropr said:
    That a lot of BS.
    The main reason why the Apple service business is successful, is the iPhone (and to a lesser extend the other devices).  And for the record, there is nothing wrong with that.

    Without the iPhone ecosystem, the Apple service business would have a lot of difficulties to differentiate itself from the competition.
    Nobody would consider using iCloud: it has less functionality and is more expensive than Dropbox, OneDrive, Google Drive, ....  If the service business could stand on its own, there should millions of Android only users having a subscription for Apple Music.
    Bad examples. Dropbox, Google Drive, One Drive do not include Music/Movie/TV streaming and email, which Apple's services business does. Like the author said, Google DOES provide those other services, so it's a better fit. Which is where most of that money comes from.

    iCloud services are NOT just a file sync services.. as you seem to think are.
    edited April 2016 baconstang
  • Reply 4 of 24
    rob53rob53 Posts: 3,245member
    cropr said:
    That a lot of BS.
    The main reason why the Apple service business is successful, is the iPhone (and to a lesser extend the other devices).  And for the record, there is nothing wrong with that.

    Without the iPhone ecosystem, the Apple service business would have a lot of difficulties to differentiate itself from the competition.
    Nobody would consider using iCloud: it has less functionality and is more expensive than Dropbox, OneDrive, Google Drive, ....  If the service business could stand on its own, there should millions of Android only users having a subscription for Apple Music.
    Sorry, but there's more to a service than just its cost and apparent lack of functionality. Google Drive files are scanned for content per Google's EULA agreement. OneDrive is owned by Microsoft, which is not somewhere I will ever go. I've tried DropBox and like it but I don't share files with a lot of other people so I really don't need this functionality. I do use iCloud Drive to share files between my Apple devices, which works fine for me. I agree that Apple's service business is based mainly on serving iOS devices but there's nothing wrong with this. It also services Macs, AppleTV and Apple Watch and will service anything else they come up with. 

    As for AAPL's rating, the stock market is such a bunch of BS it doesn't make sense. There's no way Google should have such a high P/E (in the 30's) while AAPL's is only around 11. Google doesn't produce anything, it only provides targeted advertising services, which almost everyone hates.
    radarthekatmonstrositybaconstang
  • Reply 5 of 24
    ceek74ceek74 Posts: 324member
    Gene. Munster. Enough said.
    jonl
  • Reply 6 of 24
    rogifan_newrogifan_new Posts: 4,297member
    I posted the below in another thread yesterday:

    Ben Thompson has a good post up over at Stratechery about a culture change that will need to happen inside of Apple if it's to become really good at services. Basic gist is what works well for building a product like the iPhone doesn't necessarily work for services. 

    https://stratechery.com/2016/apples-organizational-crossroads/

    Unlike many, I’m not bothered that Apple sells multiple variations of iPhone, iPads, etc. Scaling to variations is simply a matter of money and experience, which Apple has in spades. Services, though, are a fundamentally different problem that require a fundamentally different organization. If Apple is serious about services, then Cook’s promise that Apple would stay “extremely focused” is an empty one, and the insistence on a single type of organizational structure changes from enhancing Apple’s quality to actively detracting.

    Something has to give: either what makes Apple Apple, or Apple’s newfound ambitions; the measure of Cook’s leadership will be how long it takes for him to stop straddling the fence.


    if Apple is serious about services and it's not just a narrative they're using to deflect from slowing iPhone growth then I think they should really get serious about it and maybe bring someone in from the outside that doesn't have the legacy cultural baggage. Plus if these rumors of Apple looking to get into original content are correct Eddy Cue would have his hands full just overseeing iTunes, Apple Music and Apple TV. 
    I'm sorry but this is all BS. This is hardware growth slowing, especially iPhone, so we gotta come up with a new narrative so oh hey let's turn Apple into a services company! Apple is not a real services business. Everything it does is with the goal of selling more hardware, making hardware more desirable. If Apple was a real services company all their 'services' would be in every platform and/or the web. Also what Gene Munster is now valuing has always existed. It's it like Apple all of a sudden has 800M people with credit cards on file. If iPhone and iPad growth were off the charts, if an actual Apple television set was in development a Gene Munster wouldn't be pushing this Apple is a services company narrative.
    jonl
  • Reply 7 of 24
    rogifan_newrogifan_new Posts: 4,297member
    brucemc said:
    The point isn't that the business could exist on its own, but rather to try and determine a value for it.

    Given the amount of money that Apple returns to their shareholders each year, and with the cash generated each year, Apple's stock price is basically valued at the company not existing in 10 years (if you take the view that the current stock price is meant to reflect all expected future earnings).
    But how much of Apple's service revenue is App Store revenue from IAP and games like candy crush and clash of clans? I don't agree with how the company is valued but this sudden pivot to value Apple as a services company is BS and only being done because Wall Street doesn't think there's a compelling hardware story right now.
    jonl
  • Reply 8 of 24
    isteelersisteelers Posts: 738member
    sog35 said:
    This is the possible future I see with Apple:

    After iPhone/iPad growth has maxed out I can easily see Apple licensing iOS to top tier hardware makers. Apple would only license it to phones/tablets that have very specific hardware that can run iOS smoothly.

    About 1.5 billion phones/tablets are sold a year.
    Apple could charge a 10% royalty fee to run iOS on other hardware makers phones. You can bet your azz that Samsung would jump all over that.

    Long term:

    1.5 billion phones a year x $20 royalty to run iOS = $30 billion in almost pure profit.

    Same deal with OSX.  License it out to specific hardware companies.

    In 5-10 years Apple could have over 3 billion active iOS/OSX users.

    Now sell those 3 billion users services like ApplePay, AppleMusic, ect.  Those revenue streams will be absolutely massive.

    At that point hardware would be only about 30% of Apple's profits.

    That is the future.

    Buying Apple at $100 is the deal of the century.  Hold for a 10 years and the stock will be $250 with 8-10% dividend (based on $100 purchase price).  In 20 years the price could be $500 with a 25% dividend.  This can easily happen with buybacks and an expanding PE ratio because of a move to services.


    I don't think Apple will ever license any of its operating systems ever again. They may branch out into different hardware device categories like they did with the watch, but not their operating systems. That being said, I wouldn't be surprised if they made more of their services available on other platforms.  
    retrogusto
  • Reply 9 of 24
    If this was remotely true, I'd rather that Apple and its leadership make the case for it, than some outsider who does not have much more information than any one of us does from public sources.
  • Reply 10 of 24
    sog35 said:
    This is the possible future I see with Apple:

    After iPhone/iPad growth has maxed out I can easily see Apple licensing iOS to top tier hardware makers. .....

    I stopped reading right there.

    Hardware is where and how Apple makes is money. The software and services support it, not the other way around. End of story.
    nolamacguy
  • Reply 11 of 24
    rogifan_newrogifan_new Posts: 4,297member
    If this was remotely true, I'd rather that Apple and its leadership make the case for it, than some outsider who does not have much more information than any one of us does from public sources.
    And making the case is not just throwing together a slide for the earnings call that is mostly just IAP revenue from App Store.
  • Reply 12 of 24
    rogifan_newrogifan_new Posts: 4,297member

    sog35 said:
    This is the possible future I see with Apple:

    After iPhone/iPad growth has maxed out I can easily see Apple licensing iOS to top tier hardware makers. Apple would only license it to phones/tablets that have very specific hardware that can run iOS smoothly.

    About 1.5 billion phones/tablets are sold a year.
    Apple could charge a 10% royalty fee to run iOS on other hardware makers phones. You can bet your azz that Samsung would jump all over that.

    Long term:

    1.5 billion phones a year x $20 royalty to run iOS = $30 billion in almost pure profit.

    Same deal with OSX.  License it out to specific hardware companies.

    In 5-10 years Apple could have over 3 billion active iOS/OSX users.

    Now sell those 3 billion users services like ApplePay, AppleMusic, ect.  Those revenue streams will be absolutely massive.

    At that point hardware would be only about 30% of Apple's profits.

    That is the future.

    Buying Apple at $100 is the deal of the century.  Hold for a 10 years and the stock will be $250 with 8-10% dividend (based on $100 purchase price).  In 20 years the price could be $500 with a 25% dividend.  This can easily happen with buybacks and an expanding PE ratio because of a move to services.


    Apple is never going to license out its operating systems. The reason people pay a premium for Apple is because of the entire experience. What you're recommending is Apple completely move away from that to some stupid volume game and assuming all these alleged new customers would purchase Apple's services. People need to stop spewing nonsense just because iPhone sales growth is slowing.  And services is about more than just how to make money off users. Apple needs to get a lot better at the cloud and cloud services and partnering which will require a cultural shift within the company,
    nolamacguy
  • Reply 12 of 24
    brucemcbrucemc Posts: 1,541member
    brucemc said:
    The point isn't that the business could exist on its own, but rather to try and determine a value for it.

    Given the amount of money that Apple returns to their shareholders each year, and with the cash generated each year, Apple's stock price is basically valued at the company not existing in 10 years (if you take the view that the current stock price is meant to reflect all expected future earnings).
    But how much of Apple's service revenue is App Store revenue from IAP and games like candy crush and clash of clans? I don't agree with how the company is valued but this sudden pivot to value Apple as a services company is BS and only being done because Wall Street doesn't think there's a compelling hardware story right now.
    Apple is not a services company right now, but they are clearly more than a hardware device maker like Motorola Mobility was, HTC, etc.  However, that is how they are valued.  This dialogue about highlighting services is one way to try and change the narrative.  Apple has a growing services business, the best consumer ecosystem, extremely high loyalty, a growing "subscriber-like" user base, and also getting deeper into enterprise.  Nothing wrong with trying to highlight these parts more (than the pure h/w shipment numbers) in an attempt to have the investor community see the value.  While I strongly believe a company should never "manage" to the stock price (as sog keeps suggesting), it is important to frame the narrative.
  • Reply 14 of 24
    croprcropr Posts: 1,124member
    sog35 said:

    iOS, OSX, TvOS, WatchOS.  Those are its main services. Operating systems. Same as what Microsoft was with Windows.

    iOS, OSX , ... are software products,  not services.  Apple Care, iCloud , Apple Music, ... are services.  There are of course services related to operating systems, e.g support services.  A service has a time component.  You get 90 days warranty, you pay for a 3 year Apple Care contract, or you pay Apple Music per month
    tdknox
  • Reply 15 of 24
    rogifan_newrogifan_new Posts: 4,297member
    brucemc said:
    But how much of Apple's service revenue is App Store revenue from IAP and games like candy crush and clash of clans? I don't agree with how the company is valued but this sudden pivot to value Apple as a services company is BS and only being done because Wall Street doesn't think there's a compelling hardware story right now.
    Apple is not a services company right now, but they are clearly more than a hardware device maker like Motorola Mobility was, HTC, etc.  However, that is how they are valued.  This dialogue about highlighting services is one way to try and change the narrative.  Apple has a growing services business, the best consumer ecosystem, extremely high loyalty, a growing "subscriber-like" user base, and also getting deeper into enterprise.  Nothing wrong with trying to highlight these parts more (than the pure h/w shipment numbers) in an attempt to have the investor community see the value.  While I strongly believe a company should never "manage" to the stock price (as sog keeps suggesting), it is important to frame the narrative.
    Sure but this is nothing new. And I don't think a slide in an earnings release is going to get investors Apple a better PE. It just seems mostly like a panic over the iPhone narrative not being as compelling. 
  • Reply 16 of 24
    rogifan_newrogifan_new Posts: 4,297member
    sog35 said:
    I stopped reading right there.

    Hardware is where and how Apple makes is money. The software and services support it, not the other way around. End of story.
    End of story.........until hardware sales reach a limit. We are there soon.

    Apple won't stay still. They will constantly want to grow. And a way to grow is to expand the reach of iOS/OSX.  The best way to do that is to license the OS for a pretty penny. There will still be a large core of customers who will only buy Apple branded phones. But opening up iOS to other hardware makers will allow Apple to reach other price points without risking massive capital.
    And if hardware sales reach a limit they're only going to do so for Apple? Or Apple would license its OS to any cheap hardware maker out there?
  • Reply 17 of 24
    The narrative Apple seems to be pushing is using services mostly as way to promote the idea of recurring revenue.* This is why they discussed active Apple device user base and keep mentioning the iPhone upgrade program, which will likely start to branch out to include other hardware. Eventually services (overlapping with hardware upgrade programs) will become a significant part of Apples revenue relative to hardware, but we're at least 5 years away before that really starts happening.

    *Because apparently the morons on wall street can't do the simple math that sticky ecosystem + hardware = recurring revenue.
  • Reply 18 of 24
    FWIW, I hope Apple actually commits to improving their actual services. And I'm not sure if we should really give them credit for running some online stores (particularity since the search for apps/media is terrible). As far as their other services:
    -Proactive is almost never useful
    -Maps is a great app, but insanely frustrating to use since I still have to type in the exact f&cking spelling and spacing to find the locations I'm looking for.
    *-Siri is still terrible at fulfilling search requests; Siri works great for simple things like reminders, but for instance, if I say "find Bar Munich," which is a bar one mile from my apt, it says sorry, I couldn't find "barr munich," presumably since I have a contact in my phone with the last name "Barr." Similar things happen all the time.
    -Apple Pay is a joy to use, but the uptake by retailers is frustratingly slow
    -Apple Music is a bit of a mess: a great value (I use it daily), but Apple hasn't done nearly enough to promote it; Beats 1 is a great station, but again, not enough promotion; the playlists should be based on genres and sub-genres (which are still bizarrely lacking in iTunes/Apple Music) not activities or arbitrary mixes where they somehow magically find the perfect 15 songs that go together; supposedly Apple knows the specific songs that are best between Cooking, Driving, Entertaining, and BBQing??? How are these separate categories? It makes no sense whatsoever. It basically assumes people don't know what kind of music they like, and they actually expect people to one day tell siri "play me music for cooking." Dumb.

    *I've said this before, but how hard can search be, google does it.
    rogifan_newnolamacguy
  • Reply 19 of 24
    rogifan_newrogifan_new Posts: 4,297member
    FWIW, I hope Apple actually commits to improving their actual services. And I'm not sure if we should really give them credit for running some online stores (particularity since the search for apps/media is terrible). As far as their other services:
    -Proactive is almost never useful
    -Maps is a great app, but insanely frustrating to use since I still have to type in the exact f&cking spelling and spacing to find the locations I'm looking for.
    *-Siri is still terrible at fulfilling search requests; Siri works great for simple things like reminders, but for instance, if I say "find Bar Munich," which is a bar one mile from my apt, it says sorry, I couldn't find "barr munich," presumably since I have a contact in my phone with the last name "Barr." Similar things happen all the time.
    -Apple Pay is a joy to use, but the uptake by retailers is frustratingly slow
    -Apple Music is a bit of a mess: a great value (I use it daily), but Apple hasn't done nearly enough to promote it; Beats 1 is a great station, but again, not enough promotion; the playlists should be based on genres and sub-genres (which are still bizarrely lacking in iTunes/Apple Music) not activities or arbitrary mixes where they somehow magically find the perfect 15 songs that go together; supposedly Apple knows the specific songs that are best between Cooking, Driving, Entertaining, and BBQing??? How are these separate categories? It makes no sense whatsoever. It basically assumes people don't know what kind of music they like, and they actually expect people to one day tell siri "play me music for cooking." Dumb.

    *I've said this before, but how hard can search be, google does it.
    Everything under Eddy Cue is a bit of a mess. I've said before I think he needs to go or have his portfolio reduced. His organization is basically everything that doesn't neatly fit somewhere else. It's too big and a lot of it he's not the right fit for IMO, especially things like iCloud, Siri and Apple Maps.

    People can throw up all kinds of numbers around a loosely defined category called "services" because they're panicking over iPhone's slowing growth, but Apple actually needs to get good at services before it can be considered a services company. And right now it's not at all. Also one can't just assume users are going to subscribe to all these "services". Apple has what. 700-800M credit card accounts and Apple Music subscriptions are maybe 1-2% of that. I can say in my circle of family and friends I'm almost the only one with an Apple Music subscription. Everyone else either uses Pandora, free version of Spotify or YouTube. So "monetizing the user base" isn't a slam dunk.
    ac1234patchythepirate
  • Reply 20 of 24
    MacProMacPro Posts: 19,724member
    cropr said:
    That a lot of BS.
    The main reason why the Apple service business is successful, is the iPhone (and to a lesser extend the other devices).  And for the record, there is nothing wrong with that.

    Without the iPhone ecosystem, the Apple service business would have a lot of difficulties to differentiate itself from the competition.
    Nobody would consider using iCloud: it has less functionality and is more expensive than Dropbox, OneDrive, Google Drive, ....  If the service business could stand on its own, there should millions of Android only users having a subscription for Apple Music.
    If you exchange the term "Apple service business" for "Apple ecosystem" it all makes sense.  They are IMHO, one and the same thing since the service is simply a by product of the ecosystem.  Without one there is not the other (at this level of success I mean), as all those companies trying to compete in service without the 'walled garden' have discovered.
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