A team led by analyst Krish Sankar has taken a deep dive into Apple's hydra-headed Services business.
From an 81-page note to clients that landed (with a thump) on my desktop Wednesday:
We built a comprehensive Services model from the ground up to better capture content and recurring revenue growth and margin opportunities, and in parallel illuminate the interplay between hardware device sales and services...
Our Services model includes detailed:
- Active Installed Base forecasts across product categories and the flow through to major Services sub-segments
- Gross Margin contribution analysis of the major service and content sub-segments
- AppStore estimates based on Mobile App market one-time and in-app sales, and developer payouts
- iTunes download and subscription revenues with penetration rate and ASP mix assumptions for Apple Music, and early contributions from expected Video and premium News offerings,
- Licensing revenue that incorporates Google TAC trends, payments Apple receives as a Network Member, and Apple Advertising and MFi program revenues,
- ApplePay transaction fees driven by gross transaction volume estimates while accounting for deflationary % fee trends in out years,
- AppleCare sales that predict attach rates to device sales and price tier mix
- iCloud recurring revenues that model conservative adoption rates for paid storage tiers within the installed base...
We do a sum-of-the-parts analysis to arrive at our price target of $220; applying a 12x earnings multiple (FY20E EPS) to the core businesses (iPhone, hardware, etc.,) and a 25x multiple to the recurring revenue Services segment. If AAPL can be successful in its forays in some of the moon-shot opportunities such as Health care, Enterprise penetration, Augmented Reality, etc., it could further boost the blended multiple.
Outperform rating, $220 price target.
My take: Is it any surprise analysts have trouble wrapping their arms around the components of Apple's Services? Easier to just count iPhones.