Apple will maintain its dominant position in the industry’s most profitable market, says analyst Kyle McNealy.
From a note to clients that landed on my desktop Tuesday:
Apple’s “Franchise” iPhone Position Is Secure. Our analysis of ListenFirst digital/ social engagement metrics coming out of the iPhone 11/11 Pro launch shows brand engagement is higher than ever for Apple. ListenFirst’s Digital Audience Rating was higher for the iPhone 11 than the XS/XR launch last year and Samsung’s Galaxy S10 launch in February. We don’t see loyalty waning for Apple as the iOS platform creates incredible stickiness among customers. Also, most of industry profitability comes from the high-end of the smartphone market where Apple holds a dominant position.
A Significantly Expanding Services TAM. We think the Services opportunity is underestimated broadly by investors. The TAM [total addressable market] associated with Apple’s Services business is expanding rapidly as they add new offerings. In our view, Services expansion is also part of Apple’s logic for mid-range iPhone offerings. We estimate the annual Services revenue Apple generates from every active device will be $38 in FY’20. That’s up from $25 in 2017 and growing at 14%. Our iPhone units are ahead of the Street by 9m for FY’20 with most of these coming from the mid-range. If we assume these are mostly new iPhone users, Apple would make $342m in annual Services revenue off of these customers – or almost a point of services growth. We expect the total Services business to represent 20% of sales and 38% of operating profit in FY’20.
Raises rating to Buy from Neutral, raises price target to $260 from $210.
My take: This is a big (65 page) note. Jefferies is billing it as an “assumption” of coverage—rather than an upgrade—for a company they’ve been covering for years.
This series of pie charts says volumes:
Click to enlarge.