Apple Inc. (AAPL) “Ridiculously Cheap” as Music Stops Burning Cash

Tim_Cook Apple Inc music

Apple Inc. will finally see the result of months of hard work today. It’s the last day of the free trial of Apple Music. Now is the only time to decide whether or not you want to pay for it going forward, and Apple will get to see how many of the day one sign ups have found the service worth paying for.

Tim_Cook Apple Inc music

That will be a big moment for Apple. A lot of Wall Street reckons that the firm will have trouble growing its sales over the coming years. As a result sell side research houses like Cantor Fitzgerald have forecast that software and services will fuel the next leg of growth at Cupertino. We’ll see a glimpse of how that’s working when the firm reports numbers toward the end of October.

Counting losses at Apple Music

So far we’re sure that Apple Music has lost money. Taylor Swift, in an oddly public manner, brought a great deal of attention to the service when she argued that Tim Cook and his team should pay artists despite the trial being free. Mr. Cook had, reportedly, secured a deal that would see artists be paid nothing until the free trial ended.

After that profile-raising engagement Taylor Swift put her album on Apple  Music, making it the exclusive streaming provider for her popular catalogue, and Tim Cook began paying artists for their work despite not getting any sales from the service. That all changes tonight.

Once tomorrow comes CFO Luca Maestri’s finance department will send out a bill to the likely millions of iOS users that have chosen to keep Apple Music beyond its free trial.

Cupertino marketing boss Eddie Cue told the USA Today that the service had 11M free users. That number appeared in a report dated August 6, and may have increased since.

Apple Music will cost $9.99 for a single user or $14.99 for a family plan that will let up to six people listen in to streaming at once.

Apple has great prospects

Mr. White, who says that the Apple “digital ecosystem is often under appreciated” and in “the shadow of the company’s mobile device portfolio,” and other analysts will be looking to Apple Music to provide a road map for the growth of other Apple services. The firm’s Apple Pay is a much more complex affair that requires support from banks, while the Apple TV service has yet to arrive.

Mr. White reckons that there will be a dual effect from the growth of what he calls “Planet Apple,” the firm’s software and services business. Great software, he says, will help fuel growth in hardware sales, while the high install base of hardware should bring more paying service users.

As we head toward the end of the fourth quarter at Apple , and the start of a fiscal year that might see flat iPhone sales for the first time ever, Planet Apple is becoming more and more important.

Apple cares about the iPhone

Most on Wall Street are, as Mr. White suggests, are carried away by the iPhone. Steven Milunovich of UBS, in a report released just before the iPhone 6S went on sale last week, said that shares in the Cupertino firm were worth $200 as a pay-by-instalments program for the smart phone would shore up sales in the years ahead.

There’s good reason for that focus. More than two thirds of Apple sales come directly from the smart phone segment. A great deal of the rest of the firm’s sales depend in a more or less direct way on the iPhone selling well.

If Apple brings out a bad version of the device iPad sales might suffer, and buying on the App store could grind to a halt. Apple, however, is more interested in the long term. The firm will see slowing smart phone sales at some point in the next decade. When that slow down comes Mr. Cook and his team will want to be ready.

Looking for growth at Apple

Not every analyst needs to give a product innovation in order to support their price target on Apple shares. Carl Icahn, who famously pushed Tim Cook to pay out more in dividends and stock buy backs, says that Apple is simply “ridiculously cheap.”

Mr. Icahn, who made the comments in conversation with CNBC on Wednesday, said he is thinking about buying more shares in the firm.

That’s a vote of confidence in a company that, despite impressive sales and a claim to strong growth int he years ahead, has languished on the stock market. Apple shares have lost more than 13 percent of their value in the last six months. In the same time frame the S&P 500 has lost just 8 percent of its value.

Apple  is valued at a much lower level than the market as a whole by many metrics, a factor that lead Mr. Icahn to call it ridiculously cheap. Since he revealed owning shares in the firm the first time back on Aug. 13, 2013 Mr. Icahn has made an 80 percent return.

He doesn’t see Apple in terms of products, however, or at least not in the short term. Instead he wants to see how much cash the firm can pull in, and what it does with that cash. One of the reasons he likes Apple is that it’s great at dodging taxes around the world.

He probably won’t be watching the Apple Music numbers closely in order to get a feel for the future at Apple, and most of those with shares in the firm probably shouldn’t be either.

If Apple wants to succeed in streaming, the firm will try again even if Apple Music fails. The cash that it has burned so far is tiny compared to the firm’s potential. It’s likely that a vast share of that burn will be arrested once billing kicks in tomorrow.

Apple Music’s first billing day is an important milestone for Apple if Brian White is believed, but, in the grand scheme of things it’s an artificial mile marker. This may be the start of huge growth for the firm in services, but for now Mr. Milunovich’s iPhone, and Mr. Icahn’s tax policies will win the battle for trader mind share.

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