Mike Peterson
Investment Bank Morgan Stanley says that Apple's path to a $3 trillion market valuation will stem from the company's user base and an increasing shift to a subscription model.
In a note to investors seen by AppleInsider, analyst Erik Woodring — who is assuming coverage of Apple from Katy Huberty — takes a look at how a "more pronounced shift" to a subscription model could add nearly $1 trillion to Apple's current market capitalization.
"Apple's industry-leading retention rates and expanding ecosystem of hardware and services has already created one of the world's most valuable technology platforms that centralizes and controls everything from traditional communication to entertainment, social media engagement, photo & video development, gaming, business, payments, travel, fitness, and more," Woodring writes.
However, the analyst argues that the market still treats Apple like a traditional hardware maker. Woodring believes that as Apple's installed base matures, investors will gradually transition to a lifetime value (LTV) approach to Apple's business.
The analyst believes Apple meets most of the five characteristics that lead to successful subscription businesses, including the targeting of stable end-markets, high retention rates, a platform opportunity to increase customer spend, strong new custom acquisition rates, and subscription-based pricing.
Despite that, however, Apple's current stock price indicates that the market believes Apple is "just a premium, transactional hardware business." At a 23x enterprise value multiple, Apple trades at a discount compared to tech platforms, software-as-a-service businesses, and streaming services.
"In our view, this implies the market does not believe, or is not underwriting, long-term cash flow stability at Apple like it does with other subscription-based, recurring revenue businesses.
As a result, Woodring argues that Morgan Stanley's new LTV Discounted Cash Flow (LTV DCF) model implies upside to Apple investors. Viewing the company through that lens could drive at least 30% upside to the company's current stock price.
The investment banks is maintaining its $180 price target, which is based on a 6.2x enterprise value-to-sales (EV/Sales) multiple on hardware and a 6.5x EV/Sales multiple on Services. This implies a 28.9x target price-to-earnings multiple.
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11 Comments
I for one prefer a rental model for my hardware including my Mac since I keep everything on the cloud anyway. Only if they figure out a way to transfer all my apps and anything I left not synced to the cloud. Also don’t need to sign in my apps again like on Adobe CC.
I don't mind the subscription model practice.
I think it certainly has value for breaking down high ticket items like Adobe CC or Office.
However we're in a bit of a "silly season" and the dust hasn't settled. It's hard to justify
a subscription for an RSS reader app or a basic utility. Sure some people will pay but
having a small subscriber base of "exceptionals" is precarious at best financially. You're
teetering on the precipice of disaster if your base defects.