or Connect
AppleInsider › Forums › Investors › AAPL Investors › iTunes and app sales projected to grow to 20% of Apple profit by 2020
New Posts  All Forums:Forum Nav:

iTunes and app sales projected to grow to 20% of Apple profit by 2020

post #1 of 24
Thread Starter 
iTunes content and the App Store are projected to be key drivers of growth for Apple moving forward, with one new forecast calling for content and apps alone to account for 20 percent of profits by 2020.




Research firm Macquarie Capital initiated coverage of AAPL stock on Monday, with an accompanying note penned by Ben Schachter provided to AppleInsider. He expects that this year alone, Apple's iTunes, software and services business should generate about $30 billion on a gross revenue basis, which would be more than 83 percent of S&P 500 companies.

"That is almost equivalent to its iPad business and is more than Facebook, Twitter, Yahoo, LinkedIn and Netflix's combined revenue (on consensus 2014 forecasts," Schachter wrote.

He sees Apple's software, content and services business being a key profit growth driver for the company going forward. In particular, he believes the sale of applications on the iOS App Store will be the main source of growth, but he also sees high potential for iTunes content with an updated Apple TV and other potential sales driving products.

Schachter believes earnings before interest and taxes through iTunes, software and services will account for 21.8 percent of the company's profits this year. He sees it growing to 30.6 percent by fiscal 2017, and accounting for 36.4 percent of Apple's profits by fiscal 2020.




While those estimates include Apple's software and services businesses, Schachter isolated just the sales of applications and iTunes content, and his forecast sees that business alone representing 20 percent of total company earnings before interest and taxes -- almost triple its current levels.

"Notably, this could prove conservative if the iTunes non-app content segment reaccelerates," he said, noting that most growth is currently being driven by apps. "Despite our expectations for music to continue to be a headwind, new innovations around Apple TV and a potential Apple television could help drive more iTunes non-app content."

A key factor in this segment is margins -- Schachter believes Apple has more than 90 percent gross margins on sales through iTunes and the App Store, while operating margins are believed to be around 80 percent. As a result, he said these business are "punching far above their weight in terms of profit contribution."

In initiating its coverage on Monday, Macquarie has kicked off with a price target of $630 for AAPL stock. The firm advises that investors buy in, awarding Apple an "outperform" rating.
post #2 of 24
Yes, the investments made in the Data Centers do have a justification ....

There is more stupidity than hydrogen in the universe, and it has a longer shelf life.

Frank Zappa

Reply

There is more stupidity than hydrogen in the universe, and it has a longer shelf life.

Frank Zappa

Reply
post #3 of 24
This may be true, but without an iwatch, Apple is doomed! /s
post #4 of 24

Wow! I remember when iTunes was a break even portion of the business at best! Good for Apple! :)

post #5 of 24

I hate projections...why not just wait and see what happens? They're never correct anyways, good or bad. 

Mac Mini (Mid 2011) 2.5 GHz Core i5

120 GB SSD/500 GB HD/8 GB RAM

AMD Radeon HD 6630M 256 MB

Reply

Mac Mini (Mid 2011) 2.5 GHz Core i5

120 GB SSD/500 GB HD/8 GB RAM

AMD Radeon HD 6630M 256 MB

Reply
post #6 of 24

ah... well, if apple can increase any area of their business by 20%, that means that they will probably be selling more content than google and amazon and microsoft and [insert company], and wall street will subject apple to another insanely high financial forecast.  their stock will fall and they will be labeled again as a soon to be irrelevant company.

post #7 of 24

“by 2020?” Well, at least they are admitting that Apple will still be around by then and that’s an improvement from the doom and gloom stuff we always read.

post #8 of 24
Quote:
Originally Posted by jungmark View Post

This may be true, but without an iwatch, Apple is doomed! /s

Wouldn't it be: "Yea, because they will stop selling many iPhones because Samsung/Android is taking all the market share.  So iTunes sales will look bigger in comparison"?

post #9 of 24
Does the data firm cite the reasoning for their projections of flat to negative hardware growth 2015 through 2020?
post #10 of 24

Great news but naysayers? nyet!

Apple’s a leisurely alpine stroll picking scattered leprechaun coin as  nymphs and sprites sprinkle charm dust to lighten the way.

The other guy, a warty troll drooling in envy slogging away at a dark mine that spews out lustreless pyrite. Well, it’s a job.

When I find time to rewrite the laws of Physics, there'll Finally be some changes made round here!

I am not crazy! Three out of five court appointed psychiatrists said so.

Reply

When I find time to rewrite the laws of Physics, there'll Finally be some changes made round here!

I am not crazy! Three out of five court appointed psychiatrists said so.

Reply
post #11 of 24
Quote:
Originally Posted by christopher126 View Post

Wow! I remember when iTunes was a break even portion of the business at best! Good for Apple! 1smile.gif

Seems like yesterday!
From Apple ][ - to new Mac Pro I've used them all.
Long on AAPL so biased
Google Motto "You're not the customer. You're the product."
Reply
From Apple ][ - to new Mac Pro I've used them all.
Long on AAPL so biased
Google Motto "You're not the customer. You're the product."
Reply
post #12 of 24
only 20%? Fail!
post #13 of 24
Quote:
Originally Posted by christopher126 View Post
 

Wow! I remember when iTunes was a break even portion of the business at best! Good for Apple! :)

Yeah, not bad for a business there purely to support the profit making hardware business. I'd like a piece of a 'break even business' like that!

post #14 of 24
Quote:
Originally Posted by Frood View Post


My guess is that the graph doesn't show any new hardware being added to this year's mix because that's not the focus of this study. I can't see how anyone can graph out Apple's HW sales because no one knows what markets Apple will burst into and disrupt with a brand new product offering, or how long it will take Google/Samsung to copy and sell their "me too" response.
"That (the) world is moving so quickly that iOS is already amongst the older mobile operating systems in active development today." — The Verge
Reply
"That (the) world is moving so quickly that iOS is already amongst the older mobile operating systems in active development today." — The Verge
Reply
post #15 of 24
Quote:
Originally Posted by Macky the Macky View Post

My guess is that the graph doesn't show any new hardware being added to this year's mix because that's not the focus of this study. I can't see how anyone can graph out Apple's HW sales because no one knows what markets Apple will burst into and disrupt with a brand new product offering, or how long it will take Google/Samsung to copy and sell their "me too" response.

The projection is of their total business profits so any projection that fails to consider such changes in the next 6 years is even more pointless than a projection that did make up a bunch of profit categories for the next 6 years.

This bot has been removed from circulation due to a malfunctioning morality chip.

Reply

This bot has been removed from circulation due to a malfunctioning morality chip.

Reply
post #16 of 24

If iTunes/Apps go up dramatically as a proportion of Apple's sales, what effect is that likely to have on margins? (They ceiling at 30% in iTunes/App Store, right? Less cost of sales, of course.)

post #17 of 24
Interesting. What I've seen quoted from Apple's Tim Cook during earning calls is that iTunes is a "break even" part of their business, and the highest possible margin's I've seen quoted are 10%. The reason for this is that most of the money that comes in immediately goes out again as part of their 70% licensing fee to the content creators (which is similar for both music and apps). They then further have payment processing fees and content delivery costs.

If we look at the amounts listed in their Q4 2013 10-Q (quarterly earnings report), we see that they list approximately $4b of their "Net Sales" as attributable to "iTunes, Software, and Services" of an approximately $57b total. The direct margins that I've seen quoted on their iPhone and iPad product line are approximately 50%, and with a 10% margin on iTunes, that puts this part of their business as attributable to only at most 2% of total income.

What is somewhat confusing here is that they are using the term Net Sales; while different than Gross Receipts, Net Sales is nowhere near Net Income: it removes only refunds, discounts, and allowances, but is otherwise not taking into account upstream costs, and you still must factor in the margin Apple has on the products they are selling. In the case of iTunes, Apple's margin is capped at 30%, and again: most reasonable estimates I've seen have a high of 10%.

I have reached out to Apple for clarification on this matter, but I must ask that you go back to Ben Schachter and verify these details: it would be highly surprising if an area of Apple's business that has been classically considered "break even" could somehow even come close to comparing with the income from Apple's lucrative hardware sales. For avoidance of doubt, here is the quote (from Apple Insider!) from Tim Cook on these matters two years ago:

> Cook then addressed the specifics of the question, noting that Apple has lots of content, "most everything" in the music business and around 40,000 movies and 70,000 TV shows, but that it "was not there for the profit," noting that the iTunes Store is targeted to run at break even as a convenience to users, not as a business.

http://appleinsider.com/articles/12/02/23/tim_cook_addresses_questions_about_apple_dividends_a_stock_split_itunes_content_deals
post #18 of 24
Quote:
Originally Posted by paxman View Post
 

Yeah, not bad for a business there purely to support the profit making hardware business. I'd like a piece of a 'break even business' like that!

Agreed. If I did a piece of the that business...the first thing I'd do is go get myself a new pair of jeans and buy myself dinner! :)

post #19 of 24
Quote:
Originally Posted by digitalclips View Post


Seems like yesterday!

Doesn't it though! :)

 

Best

post #20 of 24
Quote:
Originally Posted by saurik View Post

Interesting. What I've seen quoted from Apple's Tim Cook during earning calls is that iTunes is a "break even" part of their business, and the highest possible margin's I've seen quoted are 10%. The reason for this is that most of the money that comes in immediately goes out again as part of their 70% licensing fee to the content creators (which is similar for both music and apps). They then further have payment processing fees and content delivery costs.

If we look at the amounts listed in their Q4 2013 10-Q (quarterly earnings report), we see that they list approximately $4b of their "Net Sales" as attributable to "iTunes, Software, and Services" of an approximately $57b total. The direct margins that I've seen quoted on their iPhone and iPad product line are approximately 50%, and with a 10% margin on iTunes, that puts this part of their business as attributable to only at most 2% of total income.

What is somewhat confusing here is that they are using the term Net Sales; while different than Gross Receipts, Net Sales is nowhere near Net Income: it removes only refunds, discounts, and allowances, but is otherwise not taking into account upstream costs, and you still must factor in the margin Apple has on the products they are selling. In the case of iTunes, Apple's margin is capped at 30%, and again: most reasonable estimates I've seen have a high of 10%.

I have reached out to Apple for clarification on this matter, but I must ask that you go back to Ben Schachter and verify these details: it would be highly surprising if an area of Apple's business that has been classically considered "break even" could somehow even come close to comparing with the income from Apple's lucrative hardware sales. For avoidance of doubt, here is the quote (from Apple Insider!) from Tim Cook on these matters two years ago:

> Cook then addressed the specifics of the question, noting that Apple has lots of content, "most everything" in the music business and around 40,000 movies and 70,000 TV shows, but that it "was not there for the profit," noting that the iTunes Store is targeted to run at break even as a convenience to users, not as a business.

http://appleinsider.com/articles/12/02/23/tim_cook_addresses_questions_about_apple_dividends_a_stock_split_itunes_content_deals

 

Well, yes, I too was wondering at the escalation from breaking even to 90%. However, you are conflating Apple's 30% cut (you call it margin) of iTunes sales with a 10% margin. Schachter was saying that Apple's 30% cut is now 80 or 90% profit, which seems pretty extraordinary and possibly suspect to me. But maybe my dull brain needs enlightening.

"If the young are not initiated into the village, they will burn it down just to feel its warmth."
- African proverb
Reply
"If the young are not initiated into the village, they will burn it down just to feel its warmth."
- African proverb
Reply
post #21 of 24
Quote:
Originally Posted by Benjamin Frost View Post
 

 

Well, yes, I too was wondering at the escalation from breaking even to 90%. However, you are conflating Apple's 30% cut (you call it margin) of iTunes sales with a 10% margin. Schachter was saying that Apple's 30% cut is now 80 or 90% profit, which seems pretty extraordinary and possibly suspect to me. But maybe my dull brain needs enlightening.

 

Maybe they're using Mechanical Turk for app approvals. ;)

post #22 of 24

This will make my broker happy!

post #23 of 24

I wonder what Steve Jobs would have thought of this...

post #24 of 24
Quote:
Originally Posted by SocialCap View Post

I wonder what Steve Jobs would have thought of this...

Wonder away.
"If the young are not initiated into the village, they will burn it down just to feel its warmth."
- African proverb
Reply
"If the young are not initiated into the village, they will burn it down just to feel its warmth."
- African proverb
Reply
New Posts  All Forums:Forum Nav:
  Return Home
  Back to Forum: AAPL Investors
AppleInsider › Forums › Investors › AAPL Investors › iTunes and app sales projected to grow to 20% of Apple profit by 2020