Apple’s TV+ event: What the analysts are saying (video)

Excerpts from the notes I’ve seen. New entries up top.

Katy Huberty, Morgan Stanley: The Service(s) Unveil We’ve Been Waiting For? Big picture, this strategy aligns with our thesis that Services, not devices, hold the key to Apple revenue and profitability growth over the next 5 years. However, the lack of specifics around pricing and timing limits us from raising estimates today. We still believe Apple is likely to bundle hardware/services and/or multiple services over time, with our September 2018 analysis suggesting Apple could generate $22-37B in revenue by 2025 for an Apple Media bundle alone, up from $3.8B in 2018. While we keep our estimates unchanged today, we mark our sum- of-the-parts (SoTP) driven price target to market, which captures the re-rating of Hardware and Services peers over the last 2 months, resulting in our new price target. Overweight. Raises price target to $220 from $197. 

Toni Sacconaghi, Bernstein: Our key takeaways. While Apple’s new offerings were not necessarily breakthrough or novel, we are encouraged by the breadth of new services and Apple’s increasing awareness of its installed base as a core, leverageable asset. The offerings appear focused on maximizing revenue generation, more so than on ecosystem enhancement… Our initial take is that these 4 new services could generate several billion in annual revenues within the next few years. Apple TV has the clearest long- term potential (with a TAM [total addressable market] in the tens of billions), but the market is extremely crowded and Apple has a dramatically narrower content library. We see the second greatest potential from the Apple Card, which we estimate could ultimately generate ~$1B in revenues. News strikes us as a compelling offering for consumers, but we struggle to construct a case where revenues to Apple would meaningfully exceed $1B. Finally, Arcade is a relative wildcard, given its novelty, and that success could potentially cannibalize App store downloads, as happened with streaming music. Market Perform, $160. 

Andrew Uerkwitz, Oppenheimer: Some Questions Unanswered Regarding New Services. Apple held a press event on 3/25 where the only physical product announced was a titanium credit card… On first look, the new subscription services seek to aggregate media content in similar models to existing offerings on the market. Apple claims to differentiate with easy-to-navigate user interface, better privacy protection and security, human curation of content, personalization enabled by on-device machine learning, and free sharing among family. Apple News Plus is immediately available while other services will launch later in 2019. Pricing of Apple TV Plus is one of the biggest unanswered questions we have after the event. Overall, it appears that Apple’s new services provide better solutions to solve relatively niche problems in media business and they may prompt existing iOS users to stay more invested in Apple’s ecosystem. Perform, no price target (since April 2016).

Samik Chatterjee, J.P. Morgan: Services Event Offers More Breadth and Less Depth; Positive on Card and Gaming, Less So on Video and News+. Apple’s event yesterday focused on launch of services and offered more breadth than investors expected, but at the same time it failed to offer the same depth that investors would have liked to see to position each category for success. Particularly with expectations being high relative to the launch of a video subscription, the launch of Apple TV+ as a pure aggregator, with little value for users outside of the convenience of access to all subscriptions through one application, likely left investors disappointed on the value proposition that would allow it to compete effectively against large streaming players despite being a late entrant in the market. However, on the positive side, while there were limited expectations for announcements beyond video, Apple went on to launch a news and magazine subscription service (Apple News+), a credit card (Apple Card), and a gaming service (Apple Arcade). Most incremental and differentiated to us appears to be the positioning of Apple Card, while Apple Arcade is also favorably positioned given limited similar services on offer. At the same time, we believe Apple News + fails to offer much additional functionality and is merely the integration of Texture’s functionality into News from the perspective of an end-user. Overweight. $228.

Rod Hall, Goldman Sachs: TV service later than expected with no pricing and no bundle for now. Credit card incremental but small impact for Apple. Apple’s Services reveal was materially different than we had anticipated. The Apple TV+ service which we expected to be available now was only previewed for Fall availability with no pricing information. An Apple Card credit card offer was announced for Summer availability with attractive spending tracking features but our calculations again imply little short term earnings impact for Apple. Apple also previewed an Arcade gaming subscription service but again for Fall availability with no pricing information. The News service announced was as we had expected and is the only Service announced that is available immediately. Finally, Apple offered no Services bundle to compel users to sign up now though this is still a possibility for the actual launch this Fall. Though all of these services are interesting from a platform churn point of view none seem likely on our calculations to materially impact EPS in the short term, with the possible exception of Apple Arcade pending pricing and service details. Apple’s Services line remains dominated by App Store commissions and TAC revenue which, when combined, made up 51% of total 2018 services revenue and 70% of Services gross profits. With small calculated impacts from these “Other services”, we expect the focus to return to the slowing iPhone business post this event. Neutral, $140. (!)

Wamsi Mohan, Merrill Lynch: New Services announced, but pricing remains a wildcard. Given some of these Services are not available until the fall, it is surprising that Apple chose to schedule this event in March. Release dates and pricing for Apple Arcade and Apple TV+ were not announced, potentially because it is still working towards pricing agreements. In our opinion, pricing (and possible bundling of services) would in large part determine adoption rate… We estimate about $0.20 EPS impact in F20. Our recent upgrade to Buy was based on improving iPhone inventory in supply chain, stabilizing order cuts, and upside from new Services. Buy. $210. 

Laura Martin, Needham: Apple Poisons Netflix. NFLX has an inferior competitive position to AAPL over time, as we see it, in both: a) customer acquisition costs; and b) content costs. AAPL has zero consumer acquisition costs since it will first target its captive 900mm global unique users, which are the wealthiest consumers in the world. Content costs are lowered by the fact that Apple is creating a storefront service and will get a rev share of subscriptions sold to HBO, Showtime, etc. This will be aided by premium original content with the biggest stars in Hollywood, if today was any indication. Strong Buy, $225.

Timothy Arcuri, UBS: Still Some Key Unknowns, But Services Launch Broadens The Narrative + Supports The Multiple.  This is… the start of a broader and deeper services narrative – one that comes against a 900MM+ iPhone installed base, ~600MM of which don’t pay a dime in services. Execution and the pricing structure for Apple TV+ are key questions, but Apple Music grew to 50MM+ subs in ~3.5yrs and of course NFLX has added ~5-6MM domestic subs/yr in the past 6yrs with international sub growth much higher. The point is that good content can really be monetized and we think there is certainly room at the table for Apple. Buy. $215.

Krish Sankar, Cowen: “It’s Show Time” had sizzle but little steak. Services show is just starting. We continue to view Services as a LT investable theme and the 3/25 event that introduced the upcoming Apple News+, Arcade, and TV+ subscription offerings suggest a differentiated but gradual approach to establishing future growth vectors. While market reactions to the event could be due to the thin details on TV+, we expect perspectives to continue shifting positively as Services grows further. Outperform, $220.

Aaron Rakers, Wells Fargo: Taking The Paid Services Narrative To The Next Level. Amid a lot of pent-up expectations and fanfare, we think Apple’s introduction of the new Apple TV+ paid subscription service, or more notably Apple’s push into original content, leaves us / investors with more questions than answers. Apple plans on launching Apple TV+ availability in the fall of 2019 in 100+ countries, but provided no details on the anticipated monthly subscription fee. With big name celebrities presenting on exclusive Apple originals (e.g., Steven Spielberg, Jennifer Aniston, Reese Witherspoon, Steve Carell, Jason Momoa, Kumail Nanjiani, Sara Bareillea, Oprah, and [of course] Big Bird), it is clear to us that Apple is all-in on spending for original content development. Market perform. Initiates $161 price target.

Daniel Ives, Wedbush: “Hello Netflix, Here we Come.” Earlier today Apple held its much anticipated streaming content event in its Steve Jobs Theater at HQ in Cupertino where the company unveiled a slew of new services including Apple News+, AppleCard and AppleArcade, which all will take a back seat to AppleTV+, the companies new video content streaming service offering original shows and movies to over 100 countries and takes direct aim at Hastings and Netflix over the coming years… Apple needs to tiptoe into this major strategic initiative as in our opinion the success on this front will play a vital role in the services growth at Cupertino for years to come. We continue to believe the company has the opportunity of capturing 100 million consumers on this streaming content service over the next 3-5 years with this major, potentially game changing content distribution service. Outperform, $215.  

Michael Olson, Piper Jaffray: Bevy of New Services Shows Focus on Extraction of Rev Per Installed Device. With lengthening hardware upgrade rates and uncertainty around new device uptake, Apple is increasingly looking to leverage its ~1.4B installed base of active devices through services. Particularly in a year like this (FY19), when iPhone feature upgrades are likely to be relatively insignificant and iPhone revenue is modeled by us (and consensus) to fall ~15% y/y, showing strong growth in the higher margin services segment is critical. We estimate services revenue will grow 17% y/y to become 18% of total sales in FY19, with a gross margin of 61%. This compares to our estimate for product revenue decline of -9% y/y and segment gross margin at 33%. We are conservatively estimating that TTM (trailing-twelve-months) services revenue per active installed device will decelerate from 19% y/y growth in FY18 to 7% in FY19. Based on the deceleration implied in our model and plethora of new services from the company, we believe Apple has the potential to show services revenue upside in FY19, which could help offset some of the negative sentiment from a weaker iPhone year. Maintains Overweight rating, raises price target to $201 from $187.

Collin Gillis, Chatham Road Partners: Apple: Slow Stream. While Apple may introduce a bigger roster of original content than Amazon and Netflix during their respective launches, the streaming  market has arguably already reached a level saturation and consumer fatigue in the United States. Netflix recorded new subscribers of 8.8 million in the most recent quarter, with only 1.5 million coming from domestic customers.  Apple is late to the party, and recent Apple launches have been lackluster. Haiku:

When you use Apple
Services, Software, and Cloud,
Are you inspired?

Gene Munster, Loup Ventures: Apple Thinks Different About Services. Each of the services announced today will add meaningfully to revenue and accelerate growth in Apple’s Services segment. In total, the four services announced could add more than $20B per year in high visibility revenue within five years and would bring Services revenue to about 25% of Apple’s total revenue, up from about 16% today. While we are maintaining our estimate of $78B in Services revenue in 2023, the levers to achieving that number are more clear

Below: 74 seconds with Gene Munster

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12 Comments

  1. Kathy Corby said:

    The Wells Fargo analyst INITIATES at $161?! Any indication of just why he thought the stock would trend down over the next year? Overall market slowdown? Hardware rev’s worse than modeled? (Hard to see that it could get worse…) . The new services falling flat on their faces? Or did he just fall asleep during the presentation?

    6
    March 25, 2019
  2. Aaron Belich said:

    And thus begins the slow steamroller that is Apple in a new field of competition. I’m looking forward to new Apple TV hardware, possible controller to tie the bow on this future arcade. Arguably, Nintendo owns the single-player, kid-friendly gaming market, but Apple just put one across its bow.

    5
    March 25, 2019
  3. Dan Scropos said:

    Here’s what I’m saying:

    Apple has created synergies that no other ecosystem can even fathom. Services will gradually take the perpetual nervous energy off of the iPhone. When Apple stopped reporting hardware sales, they weren’t hiding anything. To quite the contrary, they were signaling the beginning of a new era at Apple. And it’s here.

    Over the next 5 years, I see incredibly steady and aggressive buybacks of about $100 billion per year. In 2024, we could very well see as few as 3 billion shares, $75 billion in earnings and a much more deserving p/e of 20. 2024 price target of $500, based on current products and Services, and the introduction of AR and autonomous driving systems. 1 year price targets are for traders, not investors. Long AAPL.

    DAN

    5
    March 25, 2019
  4. Fred Stein said:

    Why the obsession about competing with Netflix and Amazon on video content? That’s only one part. And as they say in Hollywood, you’re only as good as your latest movie. While content is a great business, there is no stickiness in it.

    Apple Arcade stakes out new territory, where they are un-matched.

    Apple Pay, already going strong, just opened a new bud (as in yeast). Whether you like the beer or bread metaphor, Apple Pay has so much potential, it defies forecasting. Apple comes into this field with the best customer demographic, no overhead, no legacy baggage, and a ton of cash just in case.

    For extra credit, folks will want Apple’s new devices with better quality sight and sound to fully enjoy their video and game experiences.

    5
    March 25, 2019
  5. victor castroll said:

     closed down the day of the iPhone keynote.

    nothing new. market has no vision.

    1
    March 26, 2019
  6. Jamie McDaniel said:

    Well, at least we get this amusing CNBC headline: “Goldman Sachs analysts are underwhelmed by the new Goldman Sachs-Apple credit card.”

    2
    March 26, 2019
  7. Fred Stein said:

    Most of the analysts are like the five blind men and the elephant.

    The elephant is a massive expansion of Apple’s ecosystems far into the future. It adds stickiness for the users and explodes the universe of value-add partners / collaborators.

    With New+, Apple Arcade, Apple TV+, and Apple TV App, Apple expands from serving App developers to serving writers, videographers, photographers, and all manner of story tellers. Apple TV+ may become THE platform for documentaries and indie content.

    Apple Pay Card brings a younger demographic into Apple Pay and increases overall use of Apple Pay for all users. That Titanium card is a status symbol and billboard. The Financial services business is in the $T’s.

    Finally, this can drive iOS device upgrades. Many people, who do NOT lust for the latest iPhone or iPad, may desire more and brighter pixels for all the eye candy.

    1
    March 26, 2019

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