Analyst: 'Apple services snowball — gathering mass'

From a deep dive into Apple services by RBC's Amit Daryanani that landed in my inbox Monday:

All you need to know: We think investors have been hyperfocused on the iPhone unit trends and less focused on AAPL's ability to grow and monetize the install base. We estimate ~20% services growth is driven by combination of increased monetization of install base (Average revenue per device is ~$24) and growth in the aggregate iOS install base (1.3B devices). Fundamentally, AAPL's Services business is a critical part of the investment thesis, particularly as the smartphone market matures. Net/net: We believe AAPL stock should continue to outperform the market driven by strong FCF generation, ability for outsized capital allocation and a growing iOS install base that generates sustained and recurring FCF growth.

Services Secularly Attractive & Faster Growing: AAPL's stated goal is to grow Services business to ~$48-50B by 2020 and is already generating $30B+ in revenues. Multiple reasons why this is an attractive business: 1) Services gross margins are significantly above corporate average and can generate GM tailwind of 50-60bps annually; 2) It is highly cash flow generative; 3) Growth is largely independent of device cycles and has a long runway; and 4) The business itself should have a higher multiple than hardware and should create a better valuation narrative for AAPL. While early, we think services will grow into an important part of AAPL's strategy driving investments, determining future product roadmap and perhaps M&A.

Services Provides GM Upside: Our analysis suggests services gross margins (~60%) are ahead of corporate average and to the extent the 18% revenue CAGR is achievable it should provide 50-60bps of GM tailwind annually. Most notably, we estimate the App Store is the most material contributor to gross-margins (~85% est).

Apple services snowball

Click to enlarge.

Maintains Outperform rating and $205 target.

My take: Daryanani is not the first analyst to discover the virtues of slow and steady services growth.


  1. Fred Stein said:
    Adding one more to Amit’s list of 4 reasons why Services is an attractive business.
    5) Services increase customer loyalty, customer satisfaction, brand equity, etc.

    March 19, 2018

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