Analyst Rod Hall takes a deep dive into TV+ cost accounting and says Apple is headed for a fall.
From a note to clients that landed on my desktop Monday morning:
We continue to believe that the methodology for accounting for the TV+ Trial effectively shifts revenue out of Apple’s Product line and into the Services line, thus boosting apparent revenue growth for Services. In this report we take a deeper look at ASC 920 and ASC 926 cost accounting methods for content similar to what Netflix and Disney use and calculate margin implications for TV+ should Apple follow a similar accounting methodology. We conclude that Apple is likely to be able to offset the initial negative impacts of the TV+ trial through better hardware gross profit. However, we believe that the TV+ free trial and the accounting for it as Services revenue sets Apple on a course toward much higher content investment or extension of the free trial or both by the end of 2020.
Maintains Neutral rating and (near Street low) $165 price target.
From Hall’s note: Best estimates of Apple TV+ individual show costs I’ve seen yet.
Click to enlarge.
My take: Hall went out on a limb earlier this month with a complex accounting story nobody else picked up on. With the stock trading 30% above his 12-month price target and earnings due out in two days, he may have just sawed it off.
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