In a Tuesday note to clients, Morgan Stanley analyst Katy Huberty raised her services-related revenue forecast for Apple through 2022 even as she lowered the overall price target for AAPL stock.
“Following strong March quarter App Store results and an analysis of the key drivers of Apple’s Licensing & Other segment, we raise our already above-street FY21 and FY22 Services revenue estimates by 3% and 5% respectively, and are increasingly convinced that consensus Services forecasts over the next 2+ years are too low,” Huberty wrote.
Apple Music, iCloud, and the App Store may be the best-known Apple services. But a lucrative licensing deal that makes Google the default provider of iOS search results also drives significant services-related revenue.
Apple reportedly gains 14% to 21% of its annual profits from the Google deal. As reported by The New York Times last year:
“Apple now receives an estimated $8 billion to $12 billion in annual payments — up from $1 billion a year in 2014 — in exchange for building Google’s search engine into its products. It is probably the single biggest payment that Google makes to anyone.”
There’s no word on exactly how Apple and Google’s deal will scale in the years to come, if at all. However, if the recent upward trajectory continues, it will remain a massive part of Apple’s business.
Apple services continue to surge
In her note, Huberty also called out the roaring success of the App Store during the COVID-19 pandemic. During the first three months of 2021, customers spent a massive $32 billion on apps across iOS and Android. That marked a 40% increase from the same period last year — and the biggest quarter on record.
Huberty predicts that that growth will speed up this year:
We now forecast Apple Services revenue growth accelerates by 6 points to +22% Y/Y in FY21, up from +19% Y/Y previously, nearly 4 points ahead of FY21 consensus Services growth of +18% Y/Y.
Keeping the rest of our Product-related estimates unchanged, our stronger Services forecast pushes our FY21 and FY22 total revenue estimates 1% higher, and our FY21 and FY22 EPS 1% and 3% higher, respectively.
So, if services and overall revenue look likely to grow, why did Huberty cut Morgan Stanley’s price target for Apple from $164 to $155? The analyst cited something called “peer multiple compression.”
According to Investopedia, multiple compression is “an effect that occurs when a company’s earnings increase, but its stock price does not move in response. The result is that its price multiples, such as its P/E ratio, are reduced since the denominator increases while the numerator remains the same, even though nothing may be fundamentally wrong with the company.”
Taking that into account, Huberty cut Morgan Stanley’s price target for AAPL:
“Multiple compression over the last 2 months, primarily at Apple’s higher growth Services peers, more than offsets our higher revenue and earnings estimates, driving our new sum-of-the-parts based price target to $156, or 33x FY22 EPS, down from $164 previously.
Where do you see the big future growth in Apple’s services division coming from? Let us know your thoughts in the comments below.
Via: Apple 3.0