Goldman Sachs' Rod Hall looks at Apple through his ARPU lens

"Shorter term we believe predicting what Apple users will spend is very difficult."

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

Our view of Apple has been that stable revenue per user combined with maximized global user penetration is likely to result in slowing overall revenue growth. In this update we look at Apple’s latest iPhone installed base indications combined with reported and forecast total revenues to arrive at implied estimates of Average Revenue Per User (ARPU) over time based on our existing bottom up model.

What we find is that our active user growth forecasts are supported by Apple’s own disclosure.

Our analysis also shows that estimated ARPU was declining slowly prior to COVID. In addition, we estimate that COVID will drive a 22% ARPU increase from 2019 to 2021 that seems likely to reverse as spending patterns return to normal over time.

On a more positive note our analysis argues for stability or slight declines in ARPU over time with the exception of post-COVID normalization. Shorter term we believe predicting what Apple users will spend is very difficult. On the one hand COVID comps are potentially tough driven by demand pull forward, above average App Store spending, and higher ASP preferences. On the other hand, consumers have high levels of savings and the value of Apple’s products has arguably increased along with more flexible work and study behavior. Regardless of what happens shorter term we believe Apple will need to change recent ARPU and/or subscriber growth trends in order to continue to grow its revenues faster than GDP.

Based on our installed base model, we estimate Apple’s revenue per user will grow 19% Y/Y in CY’21, following 2% Y/Y growth in CY’20. This follows a slight ARPU decline (CAGR of -3%) from 2016 through 2019. We believe the better CY’21 level has been driven by COVID tailwinds to iPad, Mac, iPhone and Services revenue as well as a favorable consumer spending environment. See Exhibits 1 through 3 below. Going forward we intend to increasingly evaluate our modeling through this ARPU lens and, to that end, we are able to discuss segment level detail and dynamics on this basis upon request.

Maintains Neutral rating and (soggy) $140 price target.

Cue Exhibits 1 through 3:

apple goldman hall arpu lens

apple goldman hall arpu lensapple goldman hall arpu lensMy take: Has Hall come out of hibernation? His $140 is a long way from the bearish $60s and $80s of yesteryear...

apple goldman hall arpu lens

19 Comments

  1. David Emery said:
    Anything citing “consensus” as credible, without analysis of how INcredible ANALyst estimates have been, just perpetuates the bogosity of ANALyst positions.

    And looking JUST at iPhone installed base misses a lot of other stuff. But that’s again consistent with ANALyst mis-reading of Apple’s businesses.

    And showing a graph of JUST G-S/Hall’s estimates, without showing actual performance, is pure bovine effluent!

    4
    August 25, 2021
    • Gregg Thurman said:
      The spate of charts coming out of WS of late, makes me think the Street’s problem understanding Apple/AAPL is that it is over thinking the issue.

      It’s a case of way to much information. Analysts can’t see the forest through the trees. They should throw out their MBA analytics, step back, and absorb the picture as a whole.

      Rule #1. There are only 10 reasons to be in business: the first is to make a profit, the other nine don’t count.

      Nobody generates more profit dollars, or free cash flow than Apple.

      Rule #2. Build a better mouse trap: Apple is rarely the first to market a new feature or product. But when it finally releases its version it is best in class.

      Nobody has better customer satisfaction ratings. #2 is a DISTANT #2.

      The only thing holding AAPL’s price down is WS’s fear of a collapse caused by a lower priced competitor. WS fails to see that Apple’s hardware and software is mostly proprietary, nobody is going to out perform Apple’s hardware and software with off the shelf, one size fits all components.

      As is the norm, Apple’s competitors are following its lead and now are trying to catch up with their own proprietary technology. The problem for them now is that the race is over for most competitors. There will be a whole lot of consolidation from now on. But that is a defensive move. You still have to innovate, and Apple’s competitors have no clue as to whether their R&D is innovating, or generating useless gimmicks nobody wants.

      Unlike previous market gorillas (MSFT, IBM, XEROX, KODAK come to mind) Apple isn’t resting on its laurels. To the contrary, Apple will eat its young, before the competition does, with better versions and in doings so maintain its leadership position.

      That’s the forest WS can’t see through a forest of cold, soulless charts.

      5
      August 25, 2021
      • David Emery said:
        “It’s a case of way to much information.”

        Disagree. It’s a case of the WRONG information. There’s a clear unwillingness to look at things that do not contribute to confirming what the ANALysts already think.

        (And if an MBA doesn’t teach you how to handle and filter information, what -does it teach-?)

        1
        August 26, 2021
  2. Aaron Belich said:
    Well, we know that typically, anytime Rod Hall posts a target share price, AAPL never comes close to it.

    Good bye $140!

    Helloooo $250!

    PS- @PED- the article’s image is perfect!

    3
    August 25, 2021
    • Gregg Thurman said:
      PS- @PED- the article’s image is perfect!

      Except that if it were Rod Hall looking through the telescope, he would be looking through the other end.

      12
      August 25, 2021
      • Jerry Doyle said:
        @Gregg Thurman: 🙂 My second deep chuckle for the day! Great comment. 🙂

        0
        August 25, 2021
  3. « we estimate that COVID will drive a 22% ARPU increase from 2019 to 2021 that seems likely to reverse as spending patterns return to normal over time.«  I’m not really seeing any return to normal. Resistance to what was normal seems the new norm. WFH is here to stay for a wide swath of roles. Many government employees are still working from home all over East Coast. Apple Inc postponed return to office until 22. Firms with global operations don’t anticipate normal until 2023. CEO of Maersk gave an opening interview. Quarterly conference calls of all public firms still discuss impacts of Covid-19 though climate change issues encroach.

    2
    August 25, 2021
    • Gregg Thurman said:
      I’m not really seeing any return to normal.

      I believe that a great deal of Apple’s success last year came from the change in work place. That change in where work was done did pull a lot of sales forward. There will be more of that going forward, but not at the same scale as 2020.

      Once everyone has upgraded because of work from home (IMO end of 2022) upgrade cycles will return to normal.

      There is one exception, IMO, to this scenario, and that is the transition to 5G networking from WiFi Apple is committed to buying Qualcomm’s 5G radios until 2024. Beginning FY2025 I think Apple will offer 5G connectivity on all of its products, slowly phasing out WiFi (3 year transition period).

      To this end I see Apple re-introducing AirPort Extreme (potentially as a part of Apple TV hardware) not as a WiFi hub, but as a 5G hub with 5G Airport Express support. Verizon raised my subscription $10/month on a family plan with unlimited data. When 5G coverage extends to my neighborhood I’ll be cancelling my Comcast subscript $74/month). I should note that whenever I connect to 5G on my new iPad, screen refreshes and download speeds exceed Home WiFi rates.

      As WiFi and especially Qualcomm radios are phased out Apple’s gross margins are going to surge higher. I’ll be looking for 42%-43% becoming the norm.

      4
      August 25, 2021
      • Randy McCleary said:
        Gregg Thurman – Move to WIFI over cellular. It is a bombastic statement but partially true. WIFI 6 is closer to cellular 5G than ever before. However, the use of WIFI will only increase as efficient back-haul over cellular. Take a look at your cellular use on one handset ‘vs’ the 10x use on your home WIFI network by your cell phone and the many household devices. As IoT, TVs, smarthome features increase in the home and your cell phone(s) continue to add more data-hungry features, off loading to WIFI will grow. But to you point, it will also complement 5G.

        Lastly, not knowing where you reside, urban centers will see faster frequency range 2(FR2), 24Ghz mm-wave +10Gb deployments of 5G where subscriber congestions dictate handset/cellular hotspot upsells. Suburban and especially rural likely will get the slower frequency range 1(FR1), 450Mhz-6Ghz 5G @ 30Mb/up and 75Mb/down to get the name but not the uber-fast speeds. This because FR2, 5G-24Ghz has similar footprint coverage to WIFI of about 100m where the FR1, 5G 450Mhz to 6Ghz has several miles of coverage.

        -RJ

        0
        August 26, 2021
  4. Fred Stein said:
    Talk about reality distortion, check exhibit 1. It shows % YoY IB growth rate starting from the earliest days when growth exceeded 300%. This distorts the scale and makes GS forecasted growth rate (guess work) appear tiny.

    The reality is that years after folks claimed that SmartPhones had reached saturation, Apple’s IB keeps growing.

    See next:

    1
    August 25, 2021
    • Gregg Thurman said:
      This distorts the scale and makes GS forecasted growth rate (guess work) appear tiny.

      That chart clearly demonstrates why I eschew percentages as a valid metric. One firm’s 4% growth rate could be (and in Apple’s case is) larger than another’s actual growth rate that amounted to 30% or 40%.

      0
      August 25, 2021
  5. Fred Stein said:
    Next:

    The reason Apple’s revenue per IB declined is because Apple deliberately builds more robust products and supports older devices (iOS and MacOS) for longer time scales.

    Apple EARNS customer loyalty, vs churn and burn.

    4
    August 25, 2021
  6. Gary Morton said:
    Rod Hall sees services growth per user flat FY21-FY22. He says the COVID compare for the App Store will dampen growth. He did not mention that actual revenue will come for the first time for the full year from Apple TV+ subs across a huge swath of the installed base, the Apple One bundle, continued meteoric growth of Apple Pay (92% of mobile transactions), paid Podcasts off a base of $0, continued Apple Music market penetration, or substantial expected growth in advertising. Guess he does not account for those or thinks the App Store compare will negate all the growth drivers. He also did not include a look at the various reports on the # of Subscriptions that Tim or Luca have mentioned over past earnings calls. I have not done the work to graph those over time, and apparently Mr. Hall has not either. Although last I looked, Goldman Sachs has yet to send me a paycheck for doing a thorough job in analyzing the world’s most valuable company…I would speculate that such a look at subscription growth over time may not paint a picture consistent with his narrative.

    5
    August 25, 2021
  7. Paul Brindze said:
    I actually find reading this stuff useful.

    While Hall clearly has about the worst record of anyone on predicting Apple, he represents the point of view that is keeping us momentarily licked below 150.

    If AAPL was fully valued today, there would be no opportunity for us to grow here. So, in a kind of perverse way, Hall helps us all here.

    It is good to hear this point of view to understand why the overall market continues to undervalue Apple, and, seeing the errors of the bears, I feel more secure in my long term Apple investment.

    Now I can buy my wife a new M1 MacBook Pro in peace :).

    8
    August 25, 2021
  8. Jeff Galanti said:
    Any analysts who are focused on the first derivatives (rates of growth), rather than the growth itself, don’t seem to understand basic investing. Meanwhile, investors like Buffett sit back and watch the snowball grow exponentially and thank these guys for helping them to buy securities at discounts.

    1
    August 25, 2021
  9. Thomas Larkin said:
    He’s focused on a few trees, missing the forest growing up around him.
    Or, maybe he’s only trying to predict the 52 week low for the coming 52 weeks?

    1
    August 25, 2021
  10. Jacob Feenstra said:
    The problem with Rod Hall’s analysis and predictions is… his track record. If he has been consistently wrong over the last number of years there is a good chance he will be wrong again… if he stays ‘consistent’ (and I predict he will stay the way). Now if he would start making predictions based on Apple’s track record, he might actually see chance of ongoing upswing in the graphs: revenue growth and EPS.

    Many nay-sayers like Hall have said: This won’t last… and then it did. Again they say: But this time it won’t last… and then it did. And again: Okay, okay, but this time it surely won’t last… and then it did.

    2
    August 26, 2021

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