Apple TV+ & iPhone 5G will drive AAPL to $289+ a share, says Morgan Stanley

Posted:
in AAPL Investors edited September 2020
Apple TV+ in conjunction with a 5G iPhone will help accelerate Apple's Services growth to 20% in 2020, with Katy Huberty of Morgan Stanley raising the price target for the iPhone maker to $289.

'Dickinson,' one of the high-profile shows launching on Apple TV+ in November
'Dickinson,' one of the high-profile shows launching on Apple TV+ in November


Barely a week away from the launch of Apple TV+, Apple's subscription-based streaming service, Katy Huberty from Morgan Stanley advises the market doubts the new product will be worth the investment by the company. Apple is deemed to be entering a "new, more capital intensive market with a low probability of generating a positive return to shareholders," writes the analysts, but its own analysis disagrees with this observed sentiment.

In Morgan Stanley's view, in an investor note seen by AppleInsider, Apple's Services revenue growth could be boosted by 2 points in 2020, adding 1 point on average to the Full Year 2020 EPS and beyond, and an incremental $3 per share to Apple's valuation, "assuming just 1 in 10" users subscribe by 2025.

In a bear case view at half of expected paid subscribers, this could this still mean 68 million paid subscribers by 2025, providing less than a point of Services annual growth and diluting Services gross margins. For the bull version, paid subscribers reach 175 million instead of the anticipated 136 million in the base case, adding 2.4 points of Services growth until 2023.

There are three questions Morgan Stanley attempts to answer, with the first being "How much upside can Apple TV+ drive to Services estimates?" Morgan Stanley suggests it could be a $9 billion revenue business by 2025, in line with its Apple Music penetration forecast. For 2020, two points of revenue growth are expected, followed by one-point improvements until 2023.

The second, concerning the near-term headwind from bundling a free year of Apple TV+ with device purchases and ramping up video content costs, the hardware purchases will likely have Apple deferring around $57 per iPhone sold to be amortized for Apple TV+ Services revenue over that particular year, but only for customers Apple expects to redeem the offer. This is reckoned to be in the region of 5% to 10% for the first quarter of 2020, possibly reaching 40% by the end of 2020.

As for the material impact of production costs, it is assumed they are significantly higher at the start of the service and more users redeem the 12-month offer than Apple anticipates in order for it to be a problem, but even then the latter element means Apple has a higher base of users to convert once their year trial ends.

Lastly, asking on whether Apple TV+ is "accretive or dilutive to overall estimates," the firm relates to a public comment from Apple where it claims the service will not "have a material impact on our financial results," something Morgan Stanley agrees with. The incremental revenue from it "will not be enough to offset the hardware deferral," but should become accretive by 0.8% in 2021. Beyond 2021, Apple TV+ is expected to become more accretive to revenue.

Morgan Stanley has raised its price target for Apple from $247 to $289 to reflect the TV+ ramp and "peaking iPhone replacement cycle." Under the aforementioned bull case, the firm suggests the valuation could be as high as $407, though that also assumes a contraction of iPhone replacement cycles to 3.5 years.
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Comments

  • Reply 1 of 14
    I am in no hurry to sell.

    Bring it on.
    SpamSandwich
  • Reply 2 of 14
    Whatever it takes. Fingers crossed for $300 by end of year.
  • Reply 3 of 14
    AppleExposedAppleExposed Posts: 1,805unconfirmed, member
    Apple will probably unleash 5G with their own modem when it's ready and it's gonna be a BEAST along with a #Gate for clicks.
  • Reply 4 of 14
    5G was mentioned in the title and first sentence which made me question why 5G was referenced at all for this Apple TV+ article. AppleInsider, the comments about the Canada story should be your wake up notice that shoddy reporting will not be tolerated. Your readers want all-the-time quality reporting from your organization. Please pay attention because readers are.
  • Reply 5 of 14
    SoliSoli Posts: 10,038member
    5G was mentioned in the title and first sentence which made me question why 5G was referenced at all for this Apple TV+ article. AppleInsider, the comments about the Canada story should be your wake up notice that shoddy reporting will not be tolerated. Your readers want all-the-time quality reporting from your organization. Please pay attention because readers are.
    Morgan Stanley specifically mentioned 5G. Why exactly do you think AppleInsider should omit it?

    curtis hannahStrangeDays
  • Reply 6 of 14
    5G was mentioned in the title and first sentence which made me question why 5G was referenced at all for this Apple TV+ article. AppleInsider, the comments about the Canada story should be your wake up notice that shoddy reporting will not be tolerated. Your readers want all-the-time quality reporting from your organization. Please pay attention because readers are.
    They suspect 5G iPhones and Apple TV+ will be Apples biggest sales growth next year, that is the article. 
  • Reply 7 of 14
    Well, 289 Dollar would be the region where, due to NYSE rules, a split should occur. E.g. I expect a 1:4 split before next summer.
  • Reply 8 of 14
    MacProMacPro Posts: 19,776member
    Whatever it takes. Fingers crossed for $300 by end of year.
    Or even early next year I'd be happy.
    SpamSandwich
  • Reply 9 of 14
    MacProMacPro Posts: 19,776member
    I continue to hold 99.9% of mine too but I did just sell a small number of my shares so as to buy new toys.  The initial purchase price of those few shares was$350 in total.  That's given me more than enough for a Mac Pro or a tricked out iMac Pro.  I wish I could decide which.  My heart wants the Mac Pro my brain says as I am retired all I need is the iMac Pro.  /sigh

    Not to mention my screen name would be wrong if I get an iMac Pro and sell my 2013 Mac Pro lol.
    edited October 2019
  • Reply 10 of 14
    MacProMacPro Posts: 19,776member
    axcoatl said:
    Well, 289 Dollar would be the region where, due to NYSE rules, a split should occur. E.g. I expect a 1:4 split before next summer.
    I never knew there was such a rule. Wow, that would be cool.  I know it is mathematically neutral but psychologically huge for small investors that don't know they can buy share fractions.
  • Reply 11 of 14
    lkrupplkrupp Posts: 10,557member
    axcoatl said:
    Well, 289 Dollar would be the region where, due to NYSE rules, a split should occur. E.g. I expect a 1:4 split before next summer.
    Never heard of such a rule. Why is a single share of Berkshire Hathaway over $100,000.00 then? Sounds made up to me.
  • Reply 12 of 14
    SoliSoli Posts: 10,038member
    lkrupp said:
    axcoatl said:
    Well, 289 Dollar would be the region where, due to NYSE rules, a split should occur. E.g. I expect a 1:4 split before next summer.
    Never heard of such a rule. Why is a single share of Berkshire Hathaway over $100,000.00 then? Sounds made up to me.
    1) We're talking about psychological rules of thumb in a capitalistic market… it's all made up.

    2) If you understand why a company would want to spit their shares and at what value they have historically split their shares in the past then looking at BH shouldn't be a concern.

    3) I don't expect to see Apple doing it again until it's probably close to double that, since the last time they did a split the value was around $655 pre-spit. Or course, they don't have to go 7:1, which brought each share to around $94. If their focus is on the post-split value then a 3:1 split when it's around $289 would get them within the sam ballpark post-split value. It all depends on what Apple wants (which we don't know) and using internal metrics, like projected future growth (which we also don't know).
    edited October 2019
  • Reply 13 of 14
    MacProMacPro Posts: 19,776member
    lkrupp said:
    axcoatl said:
    Well, 289 Dollar would be the region where, due to NYSE rules, a split should occur. E.g. I expect a 1:4 split before next summer.
    Never heard of such a rule. Why is a single share of Berkshire Hathaway over $100,000.00 then? Sounds made up to me.
    OK good to know, I wondered if that was bogus.
  • Reply 14 of 14
    Mel must be doing cartwheels today.  ;)
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