Morgan Stanley predicts that Apple can reach a trillion valuation if the company launches a media bundle in 2019.
Image via Apple
While Apple recovers from its earnings call prediction earlier this year, many financial analysts are doubtful that the Cupertino tech giant would ever be able to repeat its feat of a trillion dollar valuation again. Morgan Stanley’s financial analyst Katy Huberty, who accurately predicted prior valuations, sees things differently.
Huberty shared her views on CNBC that Apple could see large growth if the company launches a media bundle this year consisting of music, television streaming and its new Texture news subscription. The bank targets Apple’s 12 month share price at $211 (AAPL).
This past Friday, Apple’s stock ended the week a little over $166 with a $785 billion market cap. Shares were roughly $206 apiece when the company reached its first $1 trillion valuation.
AAPL as of Friday closing, February 1.
The bank estimates that a new Apple media bundle could bring in another 2 percent annually to Apple’s growing services revenue to “drive a 5 percent revenue and 12 percent earnings per share (EPS) annual growth rate through 2023.” Apple’s ‘media bundle’ has been discussed in the media for a while, starting with a report in June 2018 via The Information claiming that Apple would be offering a possible one subscription model that included music, TV and news. The Texture built-into Apple News has been called a “Netflix for magazines.” Bloomberg reported in December however that the new magazine option had not been welcomed by advertisers.
On Tuesday of this week, Apple announced its earnings for the 2018 holiday season and last quarter, reporting $84.3 billion in revenue and $19.97 billion in profit.
Morgan Stanley predicts an increase in stock buybacks. This active buyback program along with a better knowledge of "the stabilization path for iPhone and impact of new services" will catapult Apple's valuation back past the $1 trillion mark. Huberty has previously commented on Apple’s services business back in November, predicting that Apple will expand its services division as the global hardware market contracts. She pointed out that Apple is "more engaged iOS user base and broadening portfolio of Services," compared to its competitors. Apple is thus expected to maintain 20 percent annual growth over the next five years overall due to the growing Services division.
“After repurchasing $8.8 billion of stock in the December quarter, below the prior $20 billion run-rate, we see a more active buyback program helping re-rate shares, as investors better understand the stabilization path for iPhone and impact of new services.”
Huberty expects that iPhone growth will return and that replacement rates are at mature levels.
“iPhone replacement cycles now stand at mature levels suggesting a stabilization of growth is in the cards over the next year [commenting on Apple CEO Tim Cook’s remarks]. Management’s commentary that demand improved in January is similarly encouraging.”
Huberty forecast $101 billion in Services revenue alone in 2023, a large increase from 2018 revenue of $37.2 billion. To understand these numbers in context better, it is helpful to look at Apple’s iPhone sales in the same year period. In 2018, Apple sold $112 billion in iPhone hardware in the U.S. alone. Hence, it is clear that the Services division is growing significantly.
Morgan Stanley has accurately predicted Apple's Services revenue growth over the last six quarters, more precisely than both Rosenblatt and Merrill Lynch who under-estimated Services revenue. Apple’s growing Services sector is expected to include video content, benefiting from Apple’s existing large subscriber base.