Apple Inc. may need to change the way it handles it’s accounting in order to take advantage of the latest trend on Wall Street. Goldman Sachs, in a report issued on Wednesday morning, says that Apple shares could be worth as much as $163 when traders take note of the firm’s rising service business. The only problem is that, right now, it’s almost invisible.
Goldman, in its report, said that “Apple’s business model has less in common with traditional hardware companies, and more in common with companies that monetize mobile users through content and services.” That an interesting perspective, and one that leads the investment bank to a novel assessment of Apple’s place in the mobile world.
Apple as a service
In 2015, Goldman forecasts, Alphabet Inc will generate $44 per iPhone user, Facebook Inc will make $11 from each iPhone user, while Apple Inc. will make a whopping $467 from each user on its smart phones. Goldman reckons that number, which includes recurring hardware sales, has the opportunity to grow going forward.
The firm says that between Apple Music, Apple TV and the myriad of other services coming down the line, ARPU on the iPhone could rise by as much as $150. Apple TV has not been revealed just yet, though it is widely expected to emerge next year. Goldman reckons the service will go for around $40.
Apple has put its Music service out there, and the firm has shared some info about user numbers, but it hasn’t exactly been forthcoming with its revenue numbers for the business.
The bottom line for Goldman is that the “view will start to shift in 2016 as Apple’s revenues become increasingly sticky and recurring with the launch of installment plans and a TV service, and we would use the near-term concerns over a y-o-y (year-over-year) unit decline as very attractive buying opportunity for the re-rating of Apple from a hardware stock (11X P/E) to a content and services platform (15X P/E).”
That puts the price of Apple shares at around $163 in Goldman’s view, though if the firm’s forecast is right there may be a pullback heading into next year as traders worry about whether the software story can really hold up.
Apple services remain unclear
The problem for traders is that, for the time being at least, it’s hard to tell how Apple is doing on the software and services side of its business. The vast majority of the firm’s sales come from the iPhone, that’s clear, and most of the rest is made up of sales of the iPad and the Mac.
The position of sales on the App store, and other electronic sales, is still small, but Goldman Sachs thinks it’s growing and that it will continue to grow. In the coming months the Wall Street bank reckons that traders will take the pressure off of Tim Cook and his team on iPhone sales and begin to focus more cogently on the softer side of the firm’s business.
The firm envisions Apple’s iPhone sales growth slowing in the years ahead. Intense buyer loyalty and Apple’s ecosystem will help to make the 700 million users that Goldman sees with an iPhone in 2017 become a constant source of cash. If the iPhone segment is slow, but software and services are growing at a famous clip that may be enough to justify a higher multiple for the firm as a whole.
It’s an approach that Goldman is far from the first to take to Apple. Brian White, then of Cantor Fitzgerald, put out a report earlier this year about “Planet Apple,” the digital matrix being built by the firm.
More recently an investment fund offered Apple some advice on how it might best show investors its plans to grow in the years ahead.
Apple urged to changes its accounts
Quarz Capital Management, a fund with its headquarters in Georgetown, the Cayman Islands, reckons that Apple Inc. should change the entire way it reports its earnings in order to show off the key nature of software and services toward garnering growth.
The firm’s CIO Jan F. Moermann, in a public letter to Tim Cook dated November 10, said that “the current consolidated reporting approach of the financial results as the main cause of why Apple S&S is continually valued as a hardware instead of a software business.”
He added that there was a way around that, urging Apple to split the numbers it reports for its software and service segment from the numbers it reports from the rest of the business.
This will, in the mind of Moermann, allow Wall Street to “better appreciate and value the tremendous growth dynamics and rich margins of the different S&S product lines such as iTunes, App Store, Apple Music, Apple Pay, enterprise offerings and future new service offerings.”
Apple has listened to the advice of big investors in the past, and Carl Icahn is still a major voice on the firm’s future. Mr. Icahn, however, holds stock worth around $6B. That’s one of the single biggest holdings of Cupertinto shares out there, and it may take a stake like that to convince Apple to alter its accounts.
Quarz reckons that breaking up the software and services numbers is the only way to make sure that Wall Street can see the strides that Apple is making on that side of the business. In the firm’s view Apple’s shares could rise by as much as 60 percent as a result of such a change in reporting.
If other traders believe that’s true, and the flames may be fanned by Brian White and Goldman Sachs, others may call on the firm to change its structure in order to reflect its big new software opportunity.
For now, however, despite Wall Street’s hope on the segment, software at Apple remains a bit of a mystery. It’s just not clear how much the firm is making from its non-hardware business, and how much it can expand those sales once it puts its mind to it. The launch of Apple Music was the first step in what might be a major new play for the firm.
Goldman seems to think that change ends with Apple turning itself into a growing software and services concern that just so happens to have $150B or so in annual recurring hardware sales. That’s an optimistic view, but traders will need to see Apple’s accounts in order to support it.