Apple (AAPL) got a bid on Thursday, as it increased in value by nearly 4% which was driven by some optimistic commentary relating to its services business revenue. The service business offers the most potential for growth, which is why Apple’s management team has continued to shift the focus towards service revenue growth and not hardware revenue growth in the past couple fiscal years.
The hype was driven by expectations for a streaming video service that Apple will launch on March 25th, 2019. The event will announce the launch of an Apple Video streaming product, which would compete with companies like Netflix, Amazon Prime Instant Video, and so forth.
There’s no doubt that Apple could gain momentum in the streaming segment of the market given its installed base of users, but the amount of money they would have to invest into content might create some challenges with making immediate profits from the business unit in the immediate year or so.
That being the case, there’s some optimism among analysts, as there could be room for more video streaming providers in the market. Streaming video might not be as saturated of a market, assuming Apple can price its service similarly to its competitors and could offer an expansive and differentiated TV show and movie library. The company certainly does have the financial resources to build-up a decent sized video streaming offering, but it would also face competition from well-established players in the industry for those content rights.
Apple is expected to spend $1 Billion on content this year, which means Apple would need to amass 8 million subscribers this year (at $10/month or $120/month per subscriber) for revenue to match the content spend.
Some believe that Apple could ramp-up its subscriber base even quicker. Wedbush Analyst Daniel Ives mentioned in a note released to clients of the Investment Bank on March 31st, 2019:
If Apple executes with minimal speed bumps and aggressively acquires content, given the company’s massive installed base and unmatched brand loyalty we believe reaching 100 million subs in the medium term (3 to 5 years) is a realistic goal that could translate into a $7 billion to $10 billion annual revenue stream over time for Apple and further cement its installed base and halo effect. For the stock, if Apple is successful with its latest streaming endeavor (which we believe they will be) and reaches some of these potential subs/revenues numbers annually we estimate, this will add roughly $15 per share to our SOTP valuation on Apple and translate to a $215 per share valuation for the name. We maintain our OUTPERFORM rating while raising our price target to $215 from $200. (To watch Ives’ track record, click here)
There are a lot of moving parts to these expectations, but the addition of $10 Billion in annual subscriber revenue would add $15 to the stock price based on Wedbush estimates. Of course, a lot could change in the next five-ten years, as Apple has yet to launch its streaming video product, and it did take Netflix a lot longer to reach its first 100 million subscribers (roughly 10-years from the launch of video streaming in January 2007 until April 2017 when it announced its 100 millionth subscriber). The growth ramp of Netflix was relatively incredible, and to anticipate Apple to reach 100 million subscribers within five-years might be aggressive though it’s not necessarily impossible.
Apple would need to make strategic acquisitions of entire movie production companies, which would increase its access to pre-existing tentpole movie franchises. They need some high-quality movie licenses to address its audience with new content on a regular enough basis. Assuming they have a great content offering, and they were to incorporate acquisitions into its strategy it might give them a large enough of a show/movie viewing library to compete with Netflix at 139 million subscribers, which has both the financial resources and growth runway to keep adding to its already large content library.
Even so, Apple could look at various studios like a24, Lionsgate, Sony Pictures, CBS/Viacom, and MGM according to Daniel Ives from Wedbush Securities. The bigger opportunity could be the movie or broadcast studios, as they could get acquired by either Apple or Amazon, maybe even Netflix at this point.
The incremental value to shareholders from the launch of an Apple branded streaming service seems modest, as an additional $10B in annual revenue barely moves the needle for Apple’s topline at $250B to $260B forecasted sales in FY’19 and FY’20, but it at least fuels the service revenue growth story. Until there’s a big jump in hardware sales any attempts to expand the service business would add optimism.
But, even then, the bigger opportunity is the potential M&A activity for movie studios, which would be bought at a premium. Investing into some of the smaller movie studios on industry consolidation could be an alternative investment opportunity as well.
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