As Apple Inc. (AAPL) gears up to post its most recent fourth-quarter earnings report at the start of next month, one bull on the Street sees a massive growth opportunity within the tech titan’s burgeoning software and services business, as outlined by CNBC.
Apple Services to Offset Declines in Core iPhone Business
Cupertino, Calif.-based smartphone maker Apple became the first U.S. corporation to surpass the $1 trillion market capitalization threshold earlier this year. Investors have been pleased with higher average selling prices (ASP) for Apple’s higher-margin devices, allowing the firm to offset a decline in the global smartphone market and hedge against longer iPhone replacement cycles. Meanwhile, segments like Apple Music, which is swiftly gaining ground against Spotify Technology SA (SPOT), Apple iCloud and the App Store have provided Apple with new streams of recurring revenue.
In an interview with CNBC, Bernstein analyst Toni Sacconaghi indicated that Apple’s Search Ad business could generate over $500 million in revenue this year, quadrupling to a whopping $2 billion by 2020. Apple’s high growth ad business works similarly go Alphabet Inc.’s (GOOGL) search ads on the web. Apple allows App makers to buy specific keywords so that their Search Ads can appear at the top of App Store pages, marked by a blue tint and an “Ad” marker.
Sacconaghi expects Apple to grow Search Ad by expanding where it’s offered and offering more ad spots. For example, he highlighted China as a huge market opportunity. Meanwhile, Apple’s Search Ads are currently limited to one per page.
Bernstein’s forecast implies that Search Ad would grow to the same size as Apple Music in 2017, yet with much higher gross margins.
The Apple bull stated that his forecast for Apple’s Search Ad business to grow to $2 billion in two years is “conservative,” adding that Apple is likely to meet or exceed its target of doubling its Services top line by the end of 2020 to reach $49 billion.
Trading down about 1.6% on Tuesday morning at $217.14, Apple stock reflects aa 28.3% gain year-to-date (YTD), outperforming the S&P 500’s 1.5% return over the same period.