MORGAN STANLEY: Apple's era as an iPhone company is over -- but there's another business that'll take its place

Apple CEO Tim Cook. Picture: Getty Images

  • Apple’s iPhone X may not be selling well, but its services platform has tremendous upside, according to Morgan Stanley analyst Katy L. Huberty.
  • Service revenue has grown recently, but the number of users paying for services remains low, compared to the device services market, suggesting more upside exists.
  • Morgan Stanley forecasts services revenue growth will contribute more than 50% of Apple’s total revenue growth over the next five years. The iPhone, which has contributed 86% of Apple’s revenue growth over the past five years, will make up 22% of revenue growth in the next five.

Apple may be selling fewer phones and devices, but it’s not a plateauing company, according to a note from Morgan Stanley analyst Katy L. Huberty. Instead of focusing on device sales, a focus on its services platforms should see the company through in the near future.

Apple CEO Tim Cook said on the company’s first-quarter earnings call this month that the IPhone X did not sell well. The stock, in turn, suffered slight losses.

But don’t flee Apple stock, Huberty says. “We see increasing value in the Apple platform, particularly through services monetisation,” she wrote. She gives Apple, which is trading at $US170 a share Thursday, a price target of $US203.

Although “over the last five years, the vast majority (86%) of Apple’s 8% annual revenue growth was driven by iPhone sales, it is through monetisation of Apple’s Services business that we see the company still generating mid single digit revenue growth,” she said.

Huberty estimated that roughly 60% of revenue growth is now attributable to services. That, coupled with wearables, like the Apple Smart Watch, “will drive almost all of Apple’s growth over the next five years,” she added.

Services revenue is at roughly $US30 per device, up from $US25 two years ago, but “this metric under estimates the long-term revenue potential” for services, the note said.

Firstly, most Apple users do not currently pay for services, “suggesting that revenue per “active” user is well above, and possibly double, the $US30 level.”

Also, Huberty believes not only could the $US30 number actually be $US60, but it “could approach $US100 or more.” That is because, according to the note, Amazon Prime has about 106 million users who pay about $US99 per year, and Netflix has roughly 111 million subscribers who pay about $US120 per year.

Plus, only about 18% of Apple’s total device installed base are paid subscribers, “leaving much room for improved recurring revenue,” the note said.

Here are some of the services that Morgan Stanley believes are still not fully monetized.

  • Apple Music has grown considerably, and yet only 2.9% of Apple users have it, currently.
  • iCloud subscribers are growing, and Apple is launching two new data centres in China.
  • Apple Pay is in 50% of US retail locations, and usage is still low.

Here is a visual of the growing portion of revenue growth services accounts for.

Screen Shot 2018 03 22 at 11.17.21 AMApple, Morgan Stanley

Here’s what Morgan Stanley projects for the coming years, for Apple services.

Screen Shot 2018 03 22 at 11.18.54 AMApple, Morgan Stanley

Apple shares are down 1.3% on the year.

Screen Shot 2018 03 22 at 11.21.01 AMMarkets Insider

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