Morgan Stanley: What drives Apple’s growth from here?

This is the context in which analyst Katy Huberty talks about Apple’s “media bundle.”

From a Jan. 30 note to clients by that landed on my desktop today:

So, what drives the stock from here? While investors are skeptical of a catalyst path for the stock that will drive it meaningfully above the current $166 level, we disagree.

First, iPhone replacement cycles now stand at mature levels suggesting a stabilization of growth is in the cards over the next year. Management’s commentary that demand improved in January is similarly encouraging.

Second, Apple plans to launch new services (plural) in 2019 with a video streaming service due to launch this spring. Apple Music contributed 1.5 points of Services revenue growth year 1 and 4-5 points of annual growth thereafter suggesting new Services launches can help re-accelerate Services growth.

Our analysis suggests a media bundle including video (along with Apple Music and the Texture news app) could add about 2 points annually to Services revenue growth through CY25. We also see Apple expanding its payments and advertising Services over the next year. (emphasis mine)

Huberty took another crack at the question of Apple’s future growth in a sidebar to her Jan. 31 look at Apple’s 10-Q. The section is labeled “Key Debates”:

Can Apple sustainably grow revenue and EPS? Yes, we believe the combination of increased services mix, strong wearables growth, higher share repurchases, potential M&A, and investments in new categories like video, augmented/virtual reality, artificial intelligence, health, and autos can offset declining iPhone units to drive 5% revenue growth and 12% EPS growth over the next 5 years.

Can Services growth help re-rate shares? Yes, we believe so. Apple is a structurally different company today than it was just 5 years ago, with a larger cash balance and a Services business that accounts for 13% of revenue and 21% of gross profit dollars today, growing to 30% of revenue and 46% of gross profit dollars by FY23. As device revenue slows, Services will take the baton, driving more sustainable and more profitable growth helping to re-rate shares higher.

Can Apple accelerate innovation? Yes, FY18 was the sixth year in a row that R&D growth outpaced revenue growth, translating to new products and services over time. Over the past three years, Apple spent an incremental $11.6B on R&D compared to less than $1B ahead of iPhone and iPad. This compares to minimal incremental spend at top auto makers (ex-Tesla) and $10.8B of incremental spend at Alphabet on far more projects.

Maintains Overweight Rating and $197 price target. 

My take: Huberty, who has been through thick and thin with Apple, is still a believer.


  1. Jonny Tilney said:
    ‘Still a believer’. Aren’t we all?

    February 5, 2019

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