Subscription model will drive Apple's $3T market valuation, analyst says

Services

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.