App Store privacy changes are driving advertising money elsewhere, but investment bank Cowen believes that the trend doesn't have any immediate risks and may only have a modest impact on Services growth.
In a note to investors seen by AppleInsider, Cowen analyst Krish Sankar reflects on reports that mobile advertisers are shifting their money toward Android because of Apple's App Tracking Transparency feature, which prohibits apps from tracking users across other sites and apps if enabled.
The magnitude of the ad dollars moving away from the App Store is less clear, but Sankar thinks it could still have a "modest effect on longer-term Services growth."
Despite that, Sankar doesn't see any immediate risks to the App Store. He believes Apple's app marketplace will remain a solid option because of a healthy iOS installed base and the fact that there's a higher spending potential among iPhone users than Android users.
The shift toward Android could be a temporary one as advertisers continue to adjust algorithms and discover new ways of targeting user populations. Current challenges to that end might be end user targeting and the reliance on Apple's privacy-respecting SkAdNetwork.
When it comes to Apple Search Ads, Sankar believes the feature has been improperly characterized as a rival to ad networks. He points out that the feature is about app discovery and isn't conflicting with third-party ads that show up within apps. Sankar says ASA likely generated $1.4 billion in 2021, and thinks that number could reach $2 billion in the next year or two.
Going forward, Sankar believes that increasing data quality and quantity garnered by the SKAdNetwork tool could be crucial in getting advertisers back to the iOS platform. While it's difficult to quantify the impact of lower ad spend, Sankar expects some ebbing of app purchases, in-app payments, or subscriptions.
Sankar says he expects the App Store to grow at a 13% compound annual growth rate in the coming years and could reach $88 billion in revenue by the end of 2023. Current estimates from Statista suggest that App Store spending reached a high of $85.1 billion in 2021. It's not clear if Statista or Sankar is more accurate, given that Apple doesn't typically break out App Store spending on its own.
The analyst maintains his 12-month Apple price target of $180, which is based on a 24x earnings multiple applied on Apple's core business and a 40x multiple on Services. That leads to a blended 31x price-to-earnings multiple on Cowen's 2022 earnings-per-share estimate of $5.85.