Subscription model will drive Apple's $3T market valuation, analyst says
Investment Bank Morgan Stanley says that Apple's path to a $3 trillion market valuation will stem from the company's user base and an increasing shift to a subscription model.
Services
In a note to investors seen by AppleInsider, analyst Erik Woodring -- who is assuming coverage of Apple from Katy Huberty -- takes a look at how a "more pronounced shift" to a subscription model could add nearly $1 trillion to Apple's current market capitalization.
"Apple's industry-leading retention rates and expanding ecosystem of hardware and services has already created one of the world's most valuable technology platforms that centralizes and controls everything from traditional communication to entertainment, social media engagement, photo & video development, gaming, business, payments, travel, fitness, and more," Woodring writes.
However, the analyst argues that the market still treats Apple like a traditional hardware maker. Woodring believes that as Apple's installed base matures, investors will gradually transition to a lifetime value (LTV) approach to Apple's business.
The analyst believes Apple meets most of the five characteristics that lead to successful subscription businesses, including the targeting of stable end-markets, high retention rates, a platform opportunity to increase customer spend, strong new custom acquisition rates, and subscription-based pricing.
Despite that, however, Apple's current stock price indicates that the market believes Apple is "just a premium, transactional hardware business." At a 23x enterprise value multiple, Apple trades at a discount compared to tech platforms, software-as-a-service businesses, and streaming services.
"In our view, this implies the market does not believe, or is not underwriting, long-term cash flow stability at Apple like it does with other subscription-based, recurring revenue businesses.
As a result, Woodring argues that Morgan Stanley's new LTV Discounted Cash Flow (LTV DCF) model implies upside to Apple investors. Viewing the company through that lens could drive at least 30% upside to the company's current stock price.
The investment banks is maintaining its $180 price target, which is based on a 6.2x enterprise value-to-sales (EV/Sales) multiple on hardware and a 6.5x EV/Sales multiple on Services. This implies a 28.9x target price-to-earnings multiple.
Read on AppleInsider
Services
In a note to investors seen by AppleInsider, analyst Erik Woodring -- who is assuming coverage of Apple from Katy Huberty -- takes a look at how a "more pronounced shift" to a subscription model could add nearly $1 trillion to Apple's current market capitalization.
"Apple's industry-leading retention rates and expanding ecosystem of hardware and services has already created one of the world's most valuable technology platforms that centralizes and controls everything from traditional communication to entertainment, social media engagement, photo & video development, gaming, business, payments, travel, fitness, and more," Woodring writes.
However, the analyst argues that the market still treats Apple like a traditional hardware maker. Woodring believes that as Apple's installed base matures, investors will gradually transition to a lifetime value (LTV) approach to Apple's business.
The analyst believes Apple meets most of the five characteristics that lead to successful subscription businesses, including the targeting of stable end-markets, high retention rates, a platform opportunity to increase customer spend, strong new custom acquisition rates, and subscription-based pricing.
Despite that, however, Apple's current stock price indicates that the market believes Apple is "just a premium, transactional hardware business." At a 23x enterprise value multiple, Apple trades at a discount compared to tech platforms, software-as-a-service businesses, and streaming services.
"In our view, this implies the market does not believe, or is not underwriting, long-term cash flow stability at Apple like it does with other subscription-based, recurring revenue businesses.
As a result, Woodring argues that Morgan Stanley's new LTV Discounted Cash Flow (LTV DCF) model implies upside to Apple investors. Viewing the company through that lens could drive at least 30% upside to the company's current stock price.
The investment banks is maintaining its $180 price target, which is based on a 6.2x enterprise value-to-sales (EV/Sales) multiple on hardware and a 6.5x EV/Sales multiple on Services. This implies a 28.9x target price-to-earnings multiple.
Read on AppleInsider
Comments
Adobe CC subscriber here. I don't like the subscription model but I understand why they moved to it, and I have to have it for my work. Oh well.
I think it certainly has value for breaking down high ticket items like Adobe CC or Office.
However we're in a bit of a "silly season" and the dust hasn't settled. It's hard to justify
a subscription for an RSS reader app or a basic utility. Sure some people will pay but
having a small subscriber base of "exceptionals" is precarious at best financially. You're
teetering on the precipice of disaster if your base defects.
I own my tools.
I will pay monthly for VPN, or Antivirus, or cloud space, things that require upkeep and server on the other end.
I own my computer, and the Apps I use I have paid for and use.
If I miss a payment I might not be able to access my VPN.
There is no payment to miss that would cause me to lose my graphics and painting programs or my word processor.
And my computer is mine, it sets on my desk, and it might be not the most current, but it does everything I need.
I don’t rent my tools.
In addition those that cheer for the rental model don’t realize that it costs them much more money than owning. These little monthly payments add up. I am using the same Mac I got in 2016. I’ll likely use it for at least another year or three. If I were paying for it monthly I would have paid for it a couple of times by now at least. Same with software. I really don’t need or care if Word has a new feature for legal footnotes, or supports Afrikaans. I don’t need that and see no reason to pay every month for no useful upgrade. I’ll keep using the old app I have along with the old system it’s running on. Then when I CHOOSE TO I’ll upgrade.
The amount of propaganda being pushed about this is still amazing; l wonder how much resources they've put behind it?
For a good read regarding the dismal path Apple is currently traveling down and those who drive it and the ultimate destination it will lead to, see: > Apple Is Already Dying, And This Process Has a Name <
Apple made $365b in 2021, $94b net income, they had $351b in assets and their operating expenses are $43b. The reality is they couldn't fail even if they tried. They can coast for the next 100 years if they wanted to. They will at the very least outlast everyone currently predicting their failure.
Some journalists have this weird obsession with writing fictional doomsday narratives about Apple and have done it for years, projecting that everything they don't like about how they operate will eventually destroy them with nothing to back it up. They don't do it with Microsoft/Google/Amazon and they are no different. It just shows their personal bias against Apple.
The finance people getting more involved is never good for a company, they are driven by greed and nothing else but Apple has deep infrastructure that can keep it on the right path and even if this affects Apple, it affects every big company just the same.
Having a strong recurring revenue model is the best long-term strategy for every big company because it provides stability. The Wall Street crowd are always crowing about growth because it's all they care about but who really cares what they think about anything. They don't offer any value to the world so just ignore them.
I don’t think anyone likes subscriptions unless they know going-in that their total cost of ownership over their period of ownership is going to be less than it would cost them to buy the thing outright. Getting to drive a Porsche for 2-3 years under a lease versus buying the thing is attractive for some folks. Depending on your business, leases and rentals are sometimes easier to manage than buying something outright.
Besides maintenance considerations the other factor that comes into play for the buy-vs-lease decision is the residual, resale, or salvage value of the item in question. If I buy a table saw today I can probably resell it in 5 years and get something back for it. If I buy a 2022 Edition of Turbo Tax today it ain’t worth a dime in two years. Other software may differ, but it usually comes down to the maintenance or volatility of the product itself. There’s obviously a market for some old software games and I suppose you could sell your old LPs, CDs, and 8-track tapes. But old software tools probably have limited resale value, especially when they are bound to media formats or target platforms that are no longer widely supported.
Just like you, other people and businesses try to make smart decisions around buying versus subscribing, but it’s done at a very granular level and software is always a wild card. Buy yes, I also don’t like the idea that a lot of the things that you surround yourself with in your life can suddenly vanish when the subscription lapses. Every time I lose electricity or internet service at my home for more than a few minutes I’m reminded of how close we are to living under what would be, relatively speaking, primitive conditions. Having a backup plan is probably not a bad idea.
I agree with much of what you said however if you have to rent a Porsche you can’t afford it, also Autodesk has followed Adobe down the subscription road and their programs aren’t getting better they are getting worse Autocad, Navis, and Revit have taken a dive in quality in recent times sad to say….