The Bull And Bear Case For Apple TV+

Investors assuming Apple Inc. AAPL won't make money on its soon-to-be-launched streaming video business are mistaken, according to Morgan Stanley.

The Analyst

Katy Huberty maintained an Overweight rating on Apple's stock with a price target lifted from $247 to $289.

The Thesis

Under a bear case scenario, Apple TV+ will boast just 68 million paid subscribers by fiscal 2025, which will still positively contribute to Services revenue — although by less than one point from fiscal 2020 to fiscal 2023, Huberty said in a Tuesday note. (See her track record here.)

Under a bull case scenario, Apple will service 175 million users by fiscal 2025, adding 2.4 points of Services growth through fiscal 2023, the analyst said.

The research firm's base case outlook calls for 136 million paid subscribers by fiscal 2025 and assumes 10% of all Apple users pay for the service, she said. This figure would be in line with Apple Music's penetration.

In terms of cost, Apple will likely spend $401 million in content costs — cost of goods sold — in fiscal 2020 to $4.5 billion in fiscal 2025, which would dilute Services gross margins by 11 basis points in 2020 and up to 125 basis points in 2023, Huberty said.

Yet the higher Services revenue base will more than offset the margin dilution to the point where Services gross profit dollars increase by 2.5% on average from 2020 to 2023, the analyst said.

Morgan Stanley's revised $289 price target is based on 2.9 times 2021 estimated hardware revenue of $233.3 billion and 7.1 times Services revenue of $65.8 billion, or an implied enterprise value of $1.142 trillion.

Adjusting for cash and debt generates an equity value of $1.2 trillion, or $289 per share.