Reopening, end of Apple TV+ trial are risks to Services revenue, bearish analyst says

Posted:
in AAPL Investors edited April 1
Goldman Sachs believes that a slowdown in App Store growth and the possibility of an end to Apple TV+ free trials presents "significant downside risk" to Apple's investors looking ahead to 2022.

Credit: Apple
Credit: Apple


In a services-based research note seen by AppleInsider, lead analyst Rod Hall heavily revises his Apple Services forecast as the effects of the pandemic ease and re-opening approaches.

According to Hall, a bottom-up model of Apple Services suggests that there is "significant downside risk to [2022] consensus for Services revenue." He attributes that mostly to a slowdown in App Store growth post-coronavirus.

Hall says that there could be a 2% year-over-year decline per user in 2021 as pandemic-era restrictions ease and activities move out of the home. That decline would result in growth of 3% year-over-year, down from 28% in 2020. The analyst adds that the Apple TV+ free trial continues to redistribute product revenue into Services. If Apple were to end its extended trial, it would likely result in a 4% negative impact to Goldman Sachs' 2022 Services forecast, he added.

Because of that, he expects Apple to again extend the promotional Apple TV+ trial. On the other hand, Hall says that Apple TV+ subscriptions could improve later in 2021 as COVID-19 effects on production and release could improve.

The analyst also believes that traffic acquisition costs paid by Google to Apple were heavily affected by the pandemic. He expects them to recover.

Goldman Sachs estimates that TAC growth for iOS materially slowed to 11% year-over-year in 2020, down from 25% in 2019. Going forward, Hall forecasts that TAC revenue could recover in 2021 to $15 billion and 29% year-over-year growth. Mostly, this is attributed to the fact that Google search revenue plummeted during the global health crisis.

There are a few risks to TACs, however. Hall says that a looming Justice Department case, which includes scrutiny of the payments made by Google to Apple, could impact the search giant's ability to pay Apple to be the default iOS web browser. App Tracking Transparency could also affect Google TAC payments.

Despite the potential risks to Services, Hall does believe that the launch of the Apple One bundle could be a net positive for the Cupertino tech giant.

He expects Services gross margins of 66.5% for 2021 and 64.5% for 2022, largely in-like with consensus. The analyst has raised his Services revenue forecast by 1% for 2021 and by 4% for 2022, based mostly on an assumption of a continued Apple TV+ free trial and the positive effect of the Apple One bundle.

Hall maintains his AAPL "Sell" rating and 12-month price target of $83, based on a 22x multiple on an earnings-per-share forecast of $3.79. The analyst's price target is the lowest among Apple watchers.

Shares of AAPL are currently trading at $123.45, up 1.06% in intraday trading on Thursday. On April 1, 2021, shares of AAPL were down 4.62% from the beginning of 2021, but have grown more than 100% since April 1, 2020.

Comments

  • Reply 1 of 13
    red oakred oak Posts: 844member
    App Annie just reported App Store revenue grew 40% Y/Y in Q1 of 2021.   (BTW - it would be good for AI to call that out here in this article) 

    I don't know what he is looking at that makes him believe the App Store will see a significant slowdown.  He offers nothing but his opinion.   I like to go with facts.  




    edited April 1 jas99
  • Reply 2 of 13
    mike1mike1 Posts: 2,597member
    Did he really believe the pandemic restrictions would never ease and therefore didn't bake that into his earlier forecast?!
    jas99
  • Reply 3 of 13
    quazzequazze Posts: 27member
    red oak said:
    App Annie just reported App Store revenue grew 40% Y/Y in Q1 of 2021.   (BTW - it would be good for AI to call that out here in this article) 

    I don't know what he is looking at that makes him believe the App Store will see a significant slowdown.  He offers nothing but his opinion.   I like to go with facts.  




    A part of me agrees with you, yet AI just reports the story while suppressing their personal opinion on a joke like Rod Hall.
    jas99
  • Reply 4 of 13
    CuJoYYCCuJoYYC Posts: 55member
    Rod Hall advised clients to sell Apple a year ago and issued a price target of $58. Less than a year later, he's raised his price target by 43% to $83.00 and still maintains a sell recommendation.

    Stopped clocks are more accurate than Hall. Not sure why or how he's still employed.
    jas99Beats
  • Reply 5 of 13
    DAalsethDAalseth Posts: 1,492member

    There are a few risks to TACs, however. Hall says that a looming Justice Department case, which includes scrutiny of the payments made by Google to Apple, could impact the search giant's ability to pay Apple to be the default iOS web browser.
    I think it should be the default search engine.

    Things always balance out. A lot of people updated their equipment in 2020 to work remotely. This could very well mean they won’t be updating again for a few years. The take on AppleTV+ makes sense. They have been effectively padding the numbers with the free subscriptions. Once those go away while it won’t effect revenue, it will make it clear if it is a success or not. If not I’d expect a lot of short term investors to sell, driving the stock down. 
  • Reply 6 of 13
    lkrupplkrupp Posts: 8,999member
    Hall has been hawking a sell position for nine months now while AAPL rose 7% in that time period. $83.00? We’ll see.
    edited April 1
  • Reply 7 of 13
    BeatsBeats Posts: 2,084member
    Makes no sense to me. 

    Revenue will logically rise as people using the trial will have 2 choices: pay or don’t pay, instead of just “free”.  Then you have the 25% or more people who forgot to cancel their subscription. Revenue is gonna explode here!

    The 2% yearly decrease of App Store revenue post-COVID makes some sense except he forgot that Apple is still producing new content and new shows/movies will be added in the months to come. Apple’s library is only gonna grow. They’re focused on being a big contender and already have a few “must-haves” that weren’t available day one.
    CuJoYYC said:
    Rod Hall advised clients to sell Apple a year ago and issued a price target of $58. Less than a year later, he's raised his price target by 43% to $83.00 and still maintains a sell recommendation.

    Stopped clocks are more accurate than Hall. Not sure why or how he's still employed.



    if he’s been wrong this much and still thinks AAPL will go down, he’s just shorting the stock. If that’s his job, then that’s why he’s still employed. It’s sick.
  • Reply 8 of 13
    carnegiecarnegie Posts: 943member
    Beats said:
    Makes no sense to me. 

    Revenue will logically rise as people using the trial will have 2 choices: pay or don’t pay, instead of just “free”.  Then you have the 25% or more people who forgot to cancel their subscription. Revenue is gonna explode here!

    The 2% yearly decrease of App Store revenue post-COVID makes some sense except he forgot that Apple is still producing new content and new shows/movies will be added in the months to come. Apple’s library is only gonna grow. They’re focused on being a big contender and already have a few “must-haves” that weren’t available day one.
    CuJoYYC said:
    Rod Hall advised clients to sell Apple a year ago and issued a price target of $58. Less than a year later, he's raised his price target by 43% to $83.00 and still maintains a sell recommendation.

    Stopped clocks are more accurate than Hall. Not sure why or how he's still employed.



    if he’s been wrong this much and still thinks AAPL will go down, he’s just shorting the stock. If that’s his job, then that’s why he’s still employed. It’s sick.
    For people getting free Apple TV+ because they bought a qualifying device, a portion of the revenue generated from the device sale is counted as Services revenue. We (at least I) don’t know the actual numbers, but for example: From the $700 Apple might have gotten from an iPhone sale, it might take $30 and count it as Services revenue of $2.50 per month for a year. At some point that deferred revenue runs out, perhaps replaced by the user paying for the service or by nothing.
    Beats
  • Reply 9 of 13
    davidwdavidw Posts: 1,179member
    red oak said:
    App Annie just reported App Store revenue grew 40% Y/Y in Q1 of 2021.   (BTW - it would be good for AI to call that out here in this article) 

    I don't know what he is looking at that makes him believe the App Store will see a significant slowdown.  He offers nothing but his opinion.   I like to go with facts.  




    You have to remember that 1Q 2020 (Jan to March), we were not into the pandemic yet. But 1Q 2021, we are still in the latter half of it. So the estimated 40% App Store revenue growth Y/Y was comparing a non pandemic Quarter in 2020 to a pandemic Quarter in 2021. So a 40% growth in 1Q 2021, the quarter that included the pandemic.  

    A better comparison will be 2Q 2021 to 2Q 2020, where both quarters are during the pandemic. In 2Q of 2020 we were at the beginning and 2Q 2021 we should be toward the end. That's when we should see if there's any decline of App Store revenue, due to the ending of the pandemic. And 3Q 2021 to 3Q 2020 would be better yet.  

    Also remember that he is only predicting a slow down in Apple App Store revenue growth to 4% in 2021, (basing it on an estimated 28% growth during 2020), that is related to less users and users spending less in 2021, with the ending of the pandemic. But App Store revenue is not all of the Apple Service revenue sector. Apple has always mentioned that Apple Care is the largest revenue generated in the sector, that also includes Apple Music, iTunes Music Store, Movie sales and rentals, iBooks, Apple+ and licensing. Plus Apple do not breakdown in detail the revenue numbers for each of the revenue generators in the Apple Service sector.    

    So even if there might be some validity in his 2021 Apple App Store revenue growth of only 4% Y/Y, there's no way that his $83 per share of AAPL makes any sense unless Apple  took a huge hit with all of its Y/Y revenue growth. A 4% Y/Y revenue growth for the Apple App Store in 2021, on top of an estimated 28% pandemic fueled growth in 2020, is not all that bad news.  Apple App Store revenue only grew by an estimated 3.1% Y/Y in 2019. 
  • Reply 10 of 13
    BeatsBeats Posts: 2,084member
    carnegie said:
    Beats said:
    Makes no sense to me. 

    Revenue will logically rise as people using the trial will have 2 choices: pay or don’t pay, instead of just “free”.  Then you have the 25% or more people who forgot to cancel their subscription. Revenue is gonna explode here!

    The 2% yearly decrease of App Store revenue post-COVID makes some sense except he forgot that Apple is still producing new content and new shows/movies will be added in the months to come. Apple’s library is only gonna grow. They’re focused on being a big contender and already have a few “must-haves” that weren’t available day one.
    CuJoYYC said:
    Rod Hall advised clients to sell Apple a year ago and issued a price target of $58. Less than a year later, he's raised his price target by 43% to $83.00 and still maintains a sell recommendation.

    Stopped clocks are more accurate than Hall. Not sure why or how he's still employed.



    if he’s been wrong this much and still thinks AAPL will go down, he’s just shorting the stock. If that’s his job, then that’s why he’s still employed. It’s sick.
    For people getting free Apple TV+ because they bought a qualifying device, a portion of the revenue generated from the device sale is counted as Services revenue. We (at least I) don’t know the actual numbers, but for example: From the $700 Apple might have gotten from an iPhone sale, it might take $30 and count it as Services revenue of $2.50 per month for a year. At some point that deferred revenue runs out, perhaps replaced by the user paying for the service or by nothing.


    I didn’t know this but wouldn’t new sales (especially from M1 Mac) make up for the “lost revenue? It’s not like Apple is gonna lower the price of all devices by $30. The analyst is afraid of Services revenue dropping but that revenue will just carry over to hardware.

    also, surprisingly, a MacBook I bought pre Apple TV+ announcement qualified me for the free year.
    edited April 1
  • Reply 11 of 13
    entropysentropys Posts: 2,880member
    There isn’t enough content to retain a paid monthly subscription on Apple TV+

    Just keep it free and a selling point for hardware purchases.
  • Reply 12 of 13
    carnegiecarnegie Posts: 943member
    Beats said:
    carnegie said:
    Beats said:
    Makes no sense to me. 

    Revenue will logically rise as people using the trial will have 2 choices: pay or don’t pay, instead of just “free”.  Then you have the 25% or more people who forgot to cancel their subscription. Revenue is gonna explode here!

    The 2% yearly decrease of App Store revenue post-COVID makes some sense except he forgot that Apple is still producing new content and new shows/movies will be added in the months to come. Apple’s library is only gonna grow. They’re focused on being a big contender and already have a few “must-haves” that weren’t available day one.
    CuJoYYC said:
    Rod Hall advised clients to sell Apple a year ago and issued a price target of $58. Less than a year later, he's raised his price target by 43% to $83.00 and still maintains a sell recommendation.

    Stopped clocks are more accurate than Hall. Not sure why or how he's still employed.



    if he’s been wrong this much and still thinks AAPL will go down, he’s just shorting the stock. If that’s his job, then that’s why he’s still employed. It’s sick.
    For people getting free Apple TV+ because they bought a qualifying device, a portion of the revenue generated from the device sale is counted as Services revenue. We (at least I) don’t know the actual numbers, but for example: From the $700 Apple might have gotten from an iPhone sale, it might take $30 and count it as Services revenue of $2.50 per month for a year. At some point that deferred revenue runs out, perhaps replaced by the user paying for the service or by nothing.


    I didn’t know this but wouldn’t new sales (especially from M1 Mac) make up for the “lost revenue? It’s not like Apple is gonna lower the price of all devices by $30. The analyst is afraid of Services revenue dropping but that revenue will just carry over to hardware.

    also, surprisingly, a MacBook I bought pre Apple TV+ announcement qualified me for the free year.
    Yes, presumably it would just mean that more of the revenue from new hardware sales was counted as Products revenue rather than Services revenue.
  • Reply 13 of 13
    Rod Hall is a joke that should have been fired a long time ago by GS.
    He spews this BS for attention...

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