Apple's services will grow to over $100 billion per year in 2023, says Morgan Stanley

Posted:
in AAPL Investors edited November 8
Katy Huberty from Morgan Stanley has taken a deep-dive into Apple's services market segment, and has taken a close look at the factors that will make Apple's once-overlooked aspect of its business a major factor for investors to consider now, and in the future.

Tim Cook with Jimmy Iovine
Tim Cook with Jimmy Iovine


Huberty says that Apple's course to growth in a contracting hardware market overall world-wide is in services. Apple's a "more engaged iOS user base and broadening portfolio of Services," versus its competitors makes Huberty confident that Apple will sustain 20 percent annual growth over the next five years overall, supported by Services.

Services versus iPhone growth through 2022 - source Morgan Stanley
Services versus iPhone growth through 2022 - source Morgan Stanley


The note, seen by AppleInsider, is breaking from the pack of analysts who are generally displeased by Apple no longer revealing unit sales. As a result, Morgan Stanley is forecasting 11 percent over consensus over the next four years, with the last earnings announcement marking a "services-led margin inflection, similar to when Amazon began breaking out AWS revenue and profits."

Looking far into the future, Huberty is expecting $101 billion in Services revenue alone in calendar year 2023 -- a marked increase from the fiscal year 2018 revenue of $37.2 billion. For comparison, in fiscal year 2018, Apple sold $112 billion in iPhone hardware in the US alone.

The fuel for the engine through 2023

Morgan Stanley's research suggests that 40 percent of Apple users pay for apps today, with it conservatively estimated growing to 50 percent over the next five years. Along that growth, Huberty is also expecting gross annual spending per user to expand from $120 per year to $220 per year by 2023 -- matching the per-customer spend on video games on PC and console platforms at present.

Huberty also notes that given new information, 30 percent of iOS users pay for iCloud, well more than the seven percent that they assumed previously. Through 2023, the note postulates that Apple will grow the 30 percent to 50 percent, driving a 24 percent revenue increase from storage alone.

AppleCare is driving Services revenue now, and is expected to grow it even further as phone selling prices increase, and consumers opt for more expensive iPhones. Morgan Stanley has seen "north of 20%" attach rates to the iPhone X, versus about 10 percent on older products. As a result, given conservative growth estimates, this attach rate should increase to 23 percent over the next five years, pushing revenue just from AppleCare up 15 percent.

From a cultural standpoint, Apple Music is expected to continue its existing trajectory as well. Morgan Stanley sees between 5 million and 10 million trial users now, which are "low-hanging fruit to convert to paid users." Over the next five years, the firm sees five percent Apple Music penetration to expand to 14 percent of a growing user base of Apple's products, driving a 28 percent growth in revenue in the next five years.

Apple music growth through 2023 - source Morgan Stanley
Apple music growth through 2023 - source Morgan Stanley

The road is not free of obstacles

Apple faces five major competitors, in the form of Alphabet and Amazon in the United States, plus Alibaba, Baidu, and Tencent in China. Huberty sees Alphabet and Amazon as Apple's biggest problems to expansion of Apple Music and cloud services, and the Chinese companies being a problem because of user friction in departing those services coupled with the massive user bases.

Major upside for the stock

Morgan Stanley is evidently not concerned about Apple's new accounting reports hiding something, like other analyst groups are. The firm is increasing its Apple stock price target to $253, implying a 24 percent upside.

This increase comes at a time where other analysts are cutting the price, with Rosenblatt and Merrill Lynch both concerned about future earnings potential and not seeing the increase in Services revenue despite multiple reports about it and remarks from Apple leadership.

Morgan Stanley's accuracy on services

This is the third time that Morgan Stanley has explicitly pointed out Services revenue as a big force for Apple's future growth. Over the last six quarters, the firm has accurately predicted Apple's Services revenue growth, doing so with far more precision that counterparts. On the other hand, Rosenblatt and Merrill Lynch have under-estimated Services revenue for the last several quarters.

Apple and Services' trajectory

The services category includes Digital Content and Services, AppleCare, and Apple Pay. Licensing and other services are also incorporated into the segment including iTunes, the App Store, Apple Music, and iCloud.

Apple's services revenue growth went mostly un-noticed until Apple CEO Tim Cook said in 2016 that he predicted that the segment alone would be the size of a Fortune 100 company before the end of 2017. Apple hit that goal on August 1, 2017, catapulting into 97th place ahead of Facebook's entire business.

Apple's services revenue per quarter since 2014
Apple's services revenue per quarter since 2014


Apple's future moves in services include a number of video efforts, with a suspected growth of video content budgeting swelling 54 percent every year through 2022 up to $1 billion in total. Any video on demand service anchored by these videos is expected to have a head start with about 75 million subscribers, according to recent predictions on the matter.

Comments

  • Reply 1 of 10
    Sounds good to me, but being familiar with Huberty’s track record tempers the anticipation.
  • Reply 2 of 10
    MacProMacPro Posts: 17,736member
    One trick pony my ass!  These minor blips in AAPL at the moment are nothing!  I've owned a lot of AAPL since 2006 and holding still.  No worries mates!  :)  Buy and hold.



    RonnnieOgenovellededgecko
  • Reply 3 of 10
    wood1208wood1208 Posts: 1,616member
    No one knows that far into 2023 but for now I am OK owning AAPL.
  • Reply 4 of 10
    "Services" sounds so much cooler than "App developer tax" eh?

    dedgecko
  • Reply 5 of 10
    MacPro said:
    One trick pony my ass!  These minor blips in AAPL at the moment are nothing!  I've owned a lot of AAPL since 2006 and holding still.  No worries mates!  :)  Buy and hold.



    I’m right there with you on that front.

    “Buy and hold forever.” —Warren Buffet
    jony0
  • Reply 6 of 10
    FolioFolio Posts: 393member
    Glad to hear this from her. Sure, it's impossible to predict. But I'm betting there are many good things not modeled. Yesterday got a notice from Sotheby Real Estate saying they have AR app. Field growing in App Store but still inchoate now, but maybe in her timeframe, combined richer data, higher speeds and you'll be able to assemble your favorite virtual mall, of apps of brands you favor, of pre-culled sizes and sale prices tailored to you and others. Apple's in a sweet spot here. Not to mention the enterprise programs with iPads.... As for Merrill Lynch I've not yet read their downgrades, too busy, just some of headlines about decline in China app sales.
  • Reply 7 of 10
    Apple's stock price fell like a brick after the earnings report and that's the reality. I'm not going to get myself all excited just because of some high-price target prediction. I'm sure more Apple stock downgrades will be coming to hold the stock price down for at least a couple of months. All I know is the world is being driven by Android smartphones and the BRIC nation consumers will be carrying nothing but Android smartphones like a badge of honor. Apple won't be able to sell any iPhones to those BRIC nation consumers who probably don't even earn $1100 a year in salary. That will be four enormous countries where Apple won't have but a teeny, tiny fraction of iPhone purchasers. That is so sad. It's a wonder big investors tossed Apple stock into the toilet and flushed twice.

    Whenever I hear such blatant cheer-leading for Apple's stock price or value I just find it sort of annoying. It just seems much to high considering Apple's iPhone unit sales have pretty much stagnated. I wish fellow Apple shareholders the best of luck and maybe this scenario will actually happen, but I'm not holding my breath. If I see a 10% gain (from today) in Apple's share price before the end of the year, I'll be more than pleased. It won't please those greedy big investors but I'll continue to receive my Apple dividends and that's good enough for now.  Apple's P/E is back to 18 again and it always seems to yo-yo between 18 and 20.  I never expect Apple's P/E to be higher than 20.x while all the FANG and Microsoft stock shareholders get super-high P/Es as a matter of course.
    edited November 8 dedgecko
  • Reply 8 of 10
    MacProMacPro Posts: 17,736member
    Apple's stock price fell like a brick after the earnings report and that's the reality. I'm not going to get myself all excited just because of some high-price target prediction. I'm sure more Apple stock downgrades will be coming to hold the stock price down for at least a couple of months. All I know is the world is being driven by Android smartphones and the BRIC nation consumers will be carrying nothing but Android smartphones like a badge of honor. Apple won't be able to sell any iPhones to those BRIC nation consumers who probably don't even earn $1100 a year in salary. That will be four enormous countries where Apple won't have but a teeny, tiny fraction of iPhone purchasers. That is so sad. It's a wonder big investors tossed Apple stock into the toilet and flushed twice.

    Whenever I hear such blatant cheer-leading for Apple's stock price or value I just find it sort of annoying. It just seems much to high considering Apple's iPhone unit sales have pretty much stagnated. I wish fellow Apple shareholders the best of luck and maybe this scenario will actually happen, but I'm not holding my breath. If I see a 10% gain (from today) in Apple's share price before the end of the year, I'll be more than pleased. It won't please those greedy big investors but I'll continue to receive my Apple dividends and that's good enough for now.  Apple's P/E is back to 18 again and it always seems to yo-yo between 18 and 20.  I never expect Apple's P/E to be higher than 20.x while all the FANG and Microsoft stock shareholders get super-high P/Es as a matter of course.
    Fell like a brick?  Really did you look at the graph I posted?  It was a minuscule drop in the overall picture..
    dedgecko
  • Reply 9 of 10
    brucemcbrucemc Posts: 1,449member
    Apple's stock price fell like a brick after the earnings report and that's the reality. I'm not going to get myself all excited just because of some high-price target prediction. I'm sure more Apple stock downgrades will be coming to hold the stock price down for at least a couple of months. All I know is the world is being driven by Android smartphones and the BRIC nation consumers will be carrying nothing but Android smartphones like a badge of honor. Apple won't be able to sell any iPhones to those BRIC nation consumers who probably don't even earn $1100 a year in salary. That will be four enormous countries where Apple won't have but a teeny, tiny fraction of iPhone purchasers. That is so sad. It's a wonder big investors tossed Apple stock into the toilet and flushed twice.

    Whenever I hear such blatant cheer-leading for Apple's stock price or value I just find it sort of annoying. It just seems much to high considering Apple's iPhone unit sales have pretty much stagnated. I wish fellow Apple shareholders the best of luck and maybe this scenario will actually happen, but I'm not holding my breath. If I see a 10% gain (from today) in Apple's share price before the end of the year, I'll be more than pleased. It won't please those greedy big investors but I'll continue to receive my Apple dividends and that's good enough for now.  Apple's P/E is back to 18 again and it always seems to yo-yo between 18 and 20.  I never expect Apple's P/E to be higher than 20.x while all the FANG and Microsoft stock shareholders get super-high P/Es as a matter of course.
    You are entitled to your opinion that you do not like Apple.  I don't care.  However, you are quite out to lunch when it comes to investment returns on the different tech companies.

    Looking at the longer term, we can go back to companies that were around in the mid 2000's - taking 2005 as that point - and look at the investment returns.  Based solely on todays stock price values, of the large tech companies that you could compare Apple with (Samsung, Microsoft, Google/Alphabet, Amazon) [not that all really compete with Apple, especially Amazon, but they are now in the same market cap zone and could compete more).  Here is how much the stock increased, and what the current PE is at.  This is all from Yahoo Finance.
    - Amazon=> 49x, PE=136
    - Apple => 39x, PE=18
    - Alphabet => 11x, PE= 46
    - Microsoft => 4x, PE=51
    - Samsung Electronics => 4.9x, PE= N/A (loss)

    Apple is 2nd on the total stock price return, with a current PE below the S&P 500 average, and their PE was never very high when delivering those returns.  And this does not include dividends, which only Apple and MSFT return.  Of all the companies listed above, which do you think as the potential to fall the most going forward, in a risk/return view?  

    When it comes to total profit, cash flow, and most importantly - free cash flow  - Apple has more than all the rest combined.  Why does the most successful investor in the world invest in Apple, but not the other companies?

    But sure - Apple should listen to YOUR advice because they are in serious trouble...
    MacPro
  • Reply 10 of 10
    IMHO, this is more unlikely than not to happen if Eddy Cue is in charge.
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