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

Posted:
in AAPL Investors edited March 2014
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.
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Comments

  • Reply 1 of 24
    hydrogenhydrogen Posts: 219member
    Yes, the investments made in the Data Centers do have a justification ....
  • Reply 2 of 24
    jungmarkjungmark Posts: 6,591member
    This may be true, but without an iwatch, Apple is doomed! /s
  • Reply 3 of 24

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

  • Reply 4 of 24
    macxpressmacxpress Posts: 4,673member

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

  • Reply 5 of 24
    revenantrevenant Posts: 480member

    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.

  • Reply 6 of 24
    richlorichlo Posts: 46member

    edit : how do I delete my post?

  • Reply 7 of 24
    lkrupplkrupp Posts: 6,530member

    “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.

  • Reply 8 of 24
    joelsaltjoelsalt Posts: 827member
    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"?

  • Reply 9 of 24
    froodfrood Posts: 771member
    Does the data firm cite the reasoning for their projections of flat to negative hardware growth 2015 through 2020?
  • Reply 10 of 24
    mhiklmhikl Posts: 471member

    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.

  • Reply 11 of 24
    MacProMacPro Posts: 17,835member
    Wow! I remember when iTunes was a break even portion of the business at best! Good for Apple! :)

    Seems like yesterday!
  • Reply 12 of 24
    schlackschlack Posts: 676member
    only 20%? Fail!
  • Reply 13 of 24
    paxmanpaxman Posts: 4,589member
    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!

  • Reply 14 of 24
    frood wrote: »

    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.
  • Reply 15 of 24
    solipsismxsolipsismx Posts: 19,566member
    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.
  • Reply 16 of 24
    arlorarlor Posts: 479member

    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.)

  • Reply 17 of 24
    sauriksaurik Posts: 12member
    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
  • Reply 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! :)

  • Reply 19 of 24
    Quote:

    Originally Posted by digitalclips View Post





    Seems like yesterday!

    Doesn't it though! :)

     

    Best

  • Reply 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.

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