"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:
My take: Has Hall come out of hibernation? His $140 is a long way from the bearish $60s and $80s of yesteryear...
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!
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.
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-?)
Good bye $140!
Helloooo $250!
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.
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.
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
The reality is that years after folks claimed that SmartPhones had reached saturation, Apple’s IB keeps growing.
See next:
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%.
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.
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 :).
150 price target Oct/2019
or maybe that was counting on the Aug 2020 4/1 split?
October 2019
https://www.cnbc.com/video/2019/10/08/5g-wont-bring-much-to-the-iphone-gs-apple-analyst.html
Or, maybe he’s only trying to predict the 52 week low for the coming 52 weeks?
Nothing to see here…move along
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.