Gene Munster: Service At The Core Of Apple

Apple Inc. AAPL analysts are moving toward a sure consensus: growth is in the Services.

The lessened emphasis on hardware has yielded new investment approaches.

“We believe the Apple story is well positioned for future appreciation based on a longer-term, more sustainable investing paradigm,” Loup Analyst Gene Munster recently wrote in the first installment of a four-note series. “The recent move higher in shares of AAPL is likely an early reflection of this emerging paradigm shift.”

Theme 1: iPhone Endurance

The firm’s best-selling product segment remains at the core of Munster’s bullish Apple thesis.

“The stable iPhone business is the foundation of a thriving services business,” he wrote.

Loup forecasts iPhone unit and revenue growth over the next few years given the large active install base supporting projected sales among loyal users; estimated stability in the user replacement cycle; and brand loyalty yielding above-19-percent retention rates.

Services growth and iPhone stability, in combination, are seen to generate between $40 billion and $50 billion annually.

Theme 2: Services Growth

Munster anticipates Services, including the App Store, Apple Music, iCloud, iTunes, Apple Care and Apple Pay, growing from 14 percent to 20 percent of total revenue over the next five years.

Throughout this year, alone, Munster forecasts a 15-percent increase in Services revenue per user from $30.16 to $34.76. He targets $54.58 by 2023.

The segment has averaged 23-percent year-over-year revenue growth over the last 12 years and has proven itself more profitable than hardware. By Munster’s estimates, hardware sees a 25-percent operating margin against Services’ 38 percent.

“Looking forward, we believe overall Apple margins will be stable over the next few years as higher margins in the Services segment will be offset by lower margins in the hardware segment,” Munster wrote.

He values Apple’s “software as a service” around $381 billion — more than a third of Apple’s current market cap.

Theme 3: Capital Returns

Last year, Apple operations generated $64 billion in cash — a feat Munster deemed repeatable.

“This gives us comfort that Apple has the ability to be one of the most generous companies in history in terms of giving back to its investors,” he wrote.

Considering Apple returned $47.7 billion in 2017, Munster suspects it can support $40 billion to $60 billion in annual and indefinite capital returns, which means that management could complete its targeted $100 billion capital-return commitment within two years.

The firm could then achieve its intended net cash neutrality through a $145 billion buyback, which would drive shares 16 percent. Apple’s capacity to repurchase shares at all is considered a lever to press shares higher.

Theme 4: Product Expansion

Apple has the potential to develop new products and services around trends in augmented reality, personal health, autonomous vehicles and original video production.

“New hardware products generate new Services opportunities and the company will continue to develop both in tandem as it looks to expand its ecosystem,” Munster wrote.

He expects Apple AR Glasses to launch in December 2021 and, together with the health-focused Apple Watch and AirPods, generate more than $71 billion in 2023.

Related Links:

Munster: Buybacks Will Help Distinguish Apple From Its Contemporaries

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