Morgan Stanley raises its Apple price target to $245

Streaming video and music could become a $22 billion business by 2025, says Katy Huberty, roughly the size of Netflix plus Spotify.

From a note to clients that landed in my inbox Wednesday:

Our analysis assumes Apple focuses on fewer, more targeted content than other video platforms that target a more complete replacement of cable subscriptions. On a stand-alone basis, we forecast that an Apple Video streaming service with high quality but limited breadth could be priced at the low end vs. competitors, or $7.99/month, and reach over 50M paid subscribers by 2025, compared to 124M at Netflix (current paid streaming subs) and Apple’s >650M unit iPhone installed base. This would imply that stand-alone Apple Video can grow from a ~$500M business in CY19 to a $4.4B business in just six years. Combined with Apple’s stand-alone streaming music business, which we project grows into an $18B revenue generator over the same time period (from roughly $4B at the end of CY18), streaming video and music would become a $22B business by 2025, roughly equal to the size of Netflix and Spotify combined today but just 8% of Apple’s CY18 projected revenue…

From a financial perspective, we believe there is clear reasoning as to why Apple would pursue [an] Apple Media bundle. However, we believe the most likely option will be a combination of both – i.e. offer Apple Video as a $7.99/month stand-alone option but also offer the Apple Media bundle for $12.99/month. While we’d still expect the majority of users to sign-up for the bundled product (given the strong value proposition), it would be unrealistic to think there wouldn’t be a cohort of consumers attracted only to a specific Apple Video offering, which would make the stand-alone video service the more ideal option for some. Regardless, this implies the combined Apple Music & Apple Video product could reach anywhere between $22-37B in revenue by 2025, up from an estimated $4B this year.

Maintains Overweight rating and raises price target to $245 from $232.

My take: Many a rationale will be offered for the price hikes that arrive between now and Sept. 13. This one is as good as any.

Below: Two cool Morgan Stanley graphics.

Morgan stanley 245
Morgan Stanley 245
Click to enlarge.

5 Comments

  1. Fred Stein said:
    I agree, Philip. A lot of work to raise the target. It’s cool and Katy’s cool.

    Here an easy way to get $245: At $245, with 5% share repurchases plus 5% real growth annually for 5 years means AAPL produces internal profit of 5.6% now, and grows by 10% annually.

    0
    September 5, 2018
    • Gregg Thurman said:
      AAPL gets to $245 by January without multi-year growth and buybacks.

      0
      September 6, 2018
  2. Gregg Thurman said:
    Posted this yesterday 9on the Coca-Cola thread.

    Don’t know where else to post this.

    https://www.investors.com/news/technology/click/apple-stock-iphones-bigger-screens/

    “Apple Streaming Video Service Taking Shape

    Morgan Stanley analyst Katy Huberty sees great potential for Apple’s planned streaming video service. She noted that Apple is spending about $1 billion on video content for the service this year alone. It has procured 24 new shows and forged content partnerships with the likes of Steven Spielberg, Oprah Winfrey and Sesame Workshop.

    If Apple were to launch its service at $7.99 a month, it could reach over 50 million paid subscribers by 2025, she said. Huberty thinks Apple will price its service below competitors such as Netflix (NFLX).

    Apple could decide to bundle its video service with its streaming music offering, Apple Music, and digital news and magazine subscription service, Texture, and charge $12.99 a month, she said. Huberty called the bundle the “Apple Media” service.

    “From a financial perspective, we believe there is clear reasoning as to why Apple would pursue the Apple Media bundle,” she said. “However, we believe the most likely option will be a combination of both — i.e. offer Apple Video as a $7.99/month stand-alone option but also offer the Apple Media bundle for $12.99/month.”

    I used to like Katy’s analysis, but of late (last 2 – 3 years) she seems to have gone awry.

    Case in point: when has Apple ever offered a product or service that was priced below the competition? I think her pricing models are way out of whack with what Apple will most likely do, that is, continue Apple Music at $9.99/per month, offer Apple Streaming Video at $12.99/month and a bundle (including Apple News) for $19.99/month.

    HBO, the people that started movie production outside of Hollywood, charges $20/month for its service alone.

    Neither Netflix, Spotify, Google or Hulu (all comprised primarily of Android subscribers) can match these offerings, so why undercut the competition?

    Katy also speculates that a music/video bundle would generate 50 million subscriptions by 2025. Hell, Apple Music has >35 million subscribers right now and is growing like a weed without streaming video. Another 15 – 20 million subscribers over the course of another 7 years (with a price reduction) is just pathetic.

    0
    September 6, 2018
  3. Gregg Thurman said:
    Of late I haven’t been watching Netflix at all and will drop it at the end of this month. I have turned to Amazon’s Prime because the content is of much greater quality. I’ll bet there are a lot of Netflix subscribers feeling the same way and will drop Netflix when Apple begins releasing its content. That will free up ~$10/month in the family budget to pay for an Apple subscription (if their budgets are that tight).

    0
    September 6, 2018

Leave a Reply