When Apple Inc. (NASDAQ:AAPL) reported its latest earnings results, one of the first things it touted was the “strong momentum” of its Services business, which includes iTunes and Apple Music, the App Store, iCloud, Apple Pay and more. RBC Capital’s top analyst Amit Daryanani believes Services could grow to ~$50B revenue in 2020, with Apple Music being an important driver of that growth.
Daryanani went through Spotify’s recent registration statement and note implications for streaming industry and Apple Music:
- User Growth: At ~36M subscribers, Apple Music has >50% of Spotify’s ~71M paid subscribers. Spotify grew sales at 45% CAGR since 2015 and paid users have grown ~4x since 1Q2015.
- User Churn: Streaming business appears to have very high stickiness with Spotify noting 5.1% premium user churn. This could imply pricing power in the future once Streaming market grows mature.
- Margins: Spotify’s gross margin improved from 12% in 2015 to 21% in 2017, as revenues increased from EUR1.94B to EUR4.09B. We think this is primarily due to improved terms under the revised licensing agreements with Music companies. Given low penetration of streaming, this implies the streaming profitability could grow substantially relatively quickly.
- Market Opportunity: There are 30M paid US music subscribers vs. 115M households with TV and 51M households consuming over the top content. Globally, Spotify noted 1.2B payment enabled smartphones in countries in which it was present.
Daryanani reiterates an Outperform rating on shares of Apple, with a price target of $205, which represents a potential upside of 16% from where the stock is currently trading.
According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Amit Daryanani has a yearly average return of 29.6% and a 89% success rate. Daryanani has a 31% average return when recommending AAPL, and is ranked #8 out of 4760 analysts.
Out of the 36 analysts polled in the past 12 months, 22 rate Apple stock a Buy, while 14 rate the stock a Hold. With a return potential of 8%, the stock’s consensus target price stands at $192.10.