Apple Inc. Is Growing Services Thanks to Alphabet (For Now), Tesla Inc De-Risks Bet on Model 3 with Junk Bond

Apple to Get $3 Billion from Alphabet in Fiscal 2017- What’s the Risk?

Apple Inc. (NASDAQ:AAPL) could be gaining up to $3 billion annually in license payments from fellow tech titan Alphabet, serving up Apple a key piece of its services and operational profit pie. This is quite a feat, a testament to the titan’s robust iOS platform, as Alphabet cares to be the lead search engine on the AAPL interwebs across iPhone and iPads.

Bernstein analyst Toni Sacconaghi anticipates Google payments comprise up to 25% of the titan’s past three years-worth of operating profits, making Services progressively crucial to Apple in these passing years.

As such, the analyst reiterates an Outperform rating on shares of AAPL with a $175 price target, which implies a 9% upside from current levels. (To watch Sacconaghi’s track record, click here)

Most shareholders would pinpoint the App Store coupled with iTunes/Music as Apple’s “key drivers of services,” but the analyst dismantles that theory, highlighting, “Apple’s 10-Q reporting reveals that Licensing revenues have been the biggest or second largest contributor to Apple’s YoY services growth in 10 of the last 11 quarters.”

Considering court documents reveal Alphabet doled out $1 billion to the titan three years ago, the analyst calculates total Google payments to Apple could circle $3 billion in fiscal 2017.

However, Apple’s Alphabet boost is not without liability, as Sacconaghi notes that in a twist of fates, “Google could ultimately decide that its search position is sufficiently strong that it no longer needs to pay to be the default browser.” True, “while it’s hard to say if Google might ever choose not to pay Apple, it certainly represents a potential risk for Apple,” elaborates the analyst, who sees Apple’s advantage has an Achille’s heel at stake.

“We note that press reports have indicated that the revenue share between Apple and Google was at one point 34%1, which if true and still the case today, would point to a much higher than $3B in payments from Google to Apple today,” adds Sacconaghi who surmises that in the short-term, his eyes nonetheless are peeled to the iPhone X, whose rush of upgrades “will be significant.” At the end of the day, even if Apple faces some Google jeopardy, shares nonetheless boast an “attractive risk reward” that keeps the analyst making a bullish case.

Why Debt Is Actually Logical and Cheaper for Tesla

Does Tesla Inc (NASDAQ:TSLA) need its $1.8 billion sale in debt at 5.3% yield to ramp production for forthcoming hyped mass-market Model 3? What’s the real root behind CEO Elon Musk’s premier spring to peddling pure debt?

Gene Munster – divvying insights from his research-driven, venture capital firm Loup Ventures – sees this as the kind of “bold,” savvy chess move that places Musk’s giant above the rest of traditional auto and assorted tech players. One person’s junk bond is another’s “insurance policy,” and even though the $1.8 billion is a jump from the initial objective to raise $1.5 billion at a 5.25% yield, Munster is adamantly singing the electric car giant’s praises.

“Things are going well right now, and raising the money will be much easier than it would be in the future if Tesla faced unexpected issues,” explains the research analyst. In fact, Munster finds it brilliant for Musk to make the Model 3 a less risky gamble with a debt sale that is far more about covering bases in the future- and not so much about present-day necessity.

For a moment, Munster glances ahead to a dim future where Musk waits to round up financing should the Model 3 ramp stumble upon an unanticipated pothole. Would investors be as enthusiastic? Munster ventures no, predicting, “Investors will likely get spooked and pass on the offering at Tesla’s time of need. Then the dominos would begin to fall.” Should Tesla not fund for challenges that veer from out of left field, the analyst details a fraying of Musk’s empire ending in bankruptcy, with Musk out and rival vultures like Apple and Google raring to pick up the pieces.

Some may be asking why did Musk opt for debt over equity? As a tech company, Munster finds Musk is exploring a viable, cheaper option many of his competitors do not have, benefiting from a company built on hard assets. Then there is the matter that shares are underestimated by the market present-day, and “blind optimism” or not, Munster would not be surprised to see the giant loom substantially larger in a decade.

This may be Musk’s first ever debt sale, but Munster anticipates the junk bond certainly will not be the giant’s last, as Tesla’s industrial assets are surging annually 50% to 100%. With eyes on a new production facility in three years and three future Gigafactories, the analyst expects Musk will be boosting extra money in “stages,” which he deems “consistent” and “efficient” for pacing to grow capital and assets.

“Tesla can fund debt service as long as investors believe in the story,” says Munster, who believes investors will, at least through the next three years- precisely when he wagers Musk’s giant will become profitable.

“Don’t confuse the term ‘junk bond’ with the quality of the company and magnitude of the opportunity in front of Tesla,” concludes Munster, asserting, “If successful in ramping the Model 3, Tesla’s sales will rise from $7 billion in 2016 to $22 billion in 2018, at which point a middle-income family will be able to afford an electric (and eventually autonomous) vehicle. Revenue from Model 3 will fund Model Y (expected in 2019), Tesla Semi (our best guess is 2022), and, most importantly, the master plan of accelerating the world’s transition to renewable energy.”

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