“The best way to think about AAPL… is through the lens of 1B+ of the wealthiest consumers in the world using AAPL devices 3-5 hours per day.”
From a note to Needham clients that landed on my desktop Thursday:
We argue that the best way to think about AAPL’s valuation, pricing power, competitive advantage period and barriers to entry is through the lens of 1B+ of the wealthiest consumers in the world, each using AAPL devices 3-5 hours per day.
For any ecosystem, the value equation is unique subs x revenue/sub/year x years spent inside the ecosystem. Two key important valuation upside drivers are falling churn, because it elongates time spent inside the ecosystem, which drives upside to life-time value (LTV/user), and add-ons that grow revs per unique user. Therefore, the key leading indicator for AAPL’s upside value ([our] view) is the 1B unique iPhone users owing 1.65B active devices at 12/31/20. By implication, the avg iOS user now owns 1.65 devices, up from 1.57 in Jan 2020, up from 1.55 in Jan 2019. Deeper penetration of devices per home lowers churn and raises LTV [lifetime value] per user. Services add high-margin incremental revs to LTV, and also lower churn. Subscription revs add recurring revs, and in the June 2021 quarter AAPL added 40mm subs q/q to 700mm paid subs (up 150mm y/y).
In addition, AAPL is adding new products and services that drive stickiness and ecosystem lock-in, such as: a) add-on hardware products like tablets, watches, air pods, home pods, air tags, etc; b) add-on services such as Apple Music, Arcade, AppleTV+, Fitness+, Podcasts, etc; c) family plan pricing that makes it very expensive for any person in a family to leave AAPL’s ecosystem; and, d) lower priced new iPhones, carrier subsidies, financing options plus old iPhone trade-in discounts. These ancillary products and marketing decisions lower the entry barrier to AAPL’s ecosystem (and raise the exit barriers).
Maintains Buy rating and $170 price target (while lowering December quarter iPhone shipment estimates to 80 million from 90 million per “channel checks and press reports”)
My take: Sensitivity to “press reports” notwithstanding, a solid thesis. What we’ve been saying for some time.