Katy Huberty tweaks her Apple services estimates

Apple’s App Store revenue in April was softer than she expected — except in Asia.

From a note to Morgan Stanley clients that landed on my desktop Tuesday:

Tweaking our Apple Services estimates post-April App Store data. While our bullish outlook on the long-term opportunity for improving App Store monetization is unchanged, we are now incorporating a slightly lower App Store net revenue growth rate in the near-term to account for softer than expected April 2021 App Store net revenue growth. Overall, we now assume the App Store grows 11% Y/Y in the June quarter, down from +19% Y/Y previously, which implies that following April 2021 reported App Store growth of 16% Y/Y, the App Store grows 7% Y/Y in May 2021 and 10% Y/Y in June 2021. We keep the remainder of our Apple Services segment assumptions unchanged, which drives our June quarter Services forecast to $16.46B (+25.1% Y/Y), from $16.90B (+28.4% Y/Y), which is still 140bps above consensus of $16.23B (+23.4% Y/Y).

Our price target of $161 remains unchanged as our slightly lower Services revenue base is offset by Services peer multiple expansion, and implies 31x our new FY22 EPS of $5.17 (vs. $5.20 previously)…

App Store monetization continues to reach new highs. We estimate that Apple generated $0.78 in net revenue per app download during the month of April, up 5.3% M/M, 120bps faster than the trailing 5 year (ex-COVID) seasonal average, reaching an all-time monthly record. In fact, in 35 of the 95 markets we track, net revenue per download, which we use as a proxy for App Store monetization, reached an all-time monthly record in April 2021. Gaming, which represents 62% of App Store spend and where net revenue per download reached $1.81 in April remains the ballast behind strong App Store spend, but categories such as entertainment, books and music were the primary contributors to increasing App Store monetization in April.

Maintains Overweight rating and $161 price target. 

Cue Exhibits 1 and 2:

My take: Just a tweak. She makes a point of sticking with her price target.

13 Comments

  1. Gregg Thurman said:
    Probably didn’t hurt to see App Store numbers in the Epic vs Apple trial.

    1
    May 4, 2021
    • Alan Birnbaum said:
      OT Apparently Tencent has a 48% position in Epic; Sweeney still has the majority control but is aided/abetted by our Chinese friends.

      2
      May 4, 2021
      • Fred Stein said:
        and his friends at Microsoft and at Sony.

        2
        May 4, 2021
  2. Mark Visnic said:
    Katy is far too low in her FY 2022 EPS forecast at $5.17. FY 2021 is expected to come in at $5.17 ($1.68a + $1.40a + $0.99e + $1.10e according to Bloomberg). Katy’s forecast is for zero EPS growth in FY 2022. FY 2022 consensus revenue growth is at 4.00%. Katy is implying margin contraction in 2022 on low single digit top line growth.

    This is why Apple’s share price languishes. The narrative is that Apple pulled massive demand forward and Katy’s numbers provide the support for the narrative that institutions are buying.

    5
    May 4, 2021
    • John Konopka said:
      Maybe that was a typo? It is the only place she mentions FY22. Reading through those paragraphs it would make more sense as FY21.

      0
      May 4, 2021
      • Mark Visnic said:
        @John

        Consensus FY 2022 adj EPS for Apple presently is $5.24. Read it and weep!

        0
        May 4, 2021
  3. Daniel Epstein said:
    Katy seems to be measuring growth in the App Store which impacts her Services Estimate but doesn’t change her overall price target. While it may make sense I think this is not a major blow to services growth long term. Market reaction today seems like a move in search of a reason!

    1
    May 4, 2021
    • Mark Visnic said:
      Of course it isn’t a blow to services growth long term, it is a relatively insignificant short term growth curb based on a spike in services consumption at the height of the world wide pandemic lock down in April 2020. The services compare will get progressively easier as we move forward.

      Services revenue increase will continue to be buttressed by: 1. growth of installed base; 2. expansion of service offerings; and 3. increased subscription adoption by existing installed base subscribers. The installed base had a disproportionate increase the last two quarters with the number of new additions to the ecosystem. This is very bullish and appears to be ignored by analysts in their numbers.

      The analysts, all of them, including the best of them, are mostly lagging indicator “bean counters,” unable to to see the forest for the trees and too burdened by institutional forces to be fully independent thinkers.

      1
      May 4, 2021
      • Bart Yee said:
        Huberty was only 5.8% low on her Q2 Services and almost the highest of the Pros last quarter. That’s still a $1.0B off. Last April 2020 saw the successful launch of the iPhone SE 2020 in latter half of April likely giving a boost to Services revenue then stretching into May and June, plus WFH getting started. My sense is the iMac and iPad April 2021 intros could do much the same plus gaming could be same or more pronounced with the larger display devices.

        As we move further away from holiday quarters and enter into iPhone supply-demand device equilibrium we will see some Services moderation, especially as the US (hopefully successfully) reopens into summer-autumn. Outdoor and recreation (movies, restaurants, concerts) activities will then compete for $$$$ spending. This may be offset by return to school season which could definitely favor Apple hardware, then Services growth into the 4th quarter. Will it be better than YOY? I think Services will continue to grow. All of us except one who overshot underestimated Services in Q2. I see no reason for it to slow growth YOY into June Quarter.

        0
        May 4, 2021
  4. bas flik said:
    if you are 40% off in your estimation you can better resign. to me proof that analysts are entangled in spreadsheets and are blind for real economics. On my path to the future i only search for cashflows. They will keep me alive.

    4
    May 4, 2021

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