The Apple (AAPL) "Show Time" event on March 25 had more to do with the way the tech giant can easily monetize a premium user base than with a specific new one Technology. While analysts focus on existing space competition and whether Apple delayed the video streaming game, the key is how easily the company is positioned to make money with these subscription plans without that there are significant technical improvements. The opportunity for highly profitable subscription revenue streams increases our bullish investment hypothesis.
$ 20 billion by 2023
At the event on Monday, Apple released a whole host of services. The tech and media world has already worked out the service offering, so this article does not focus too much on reconstructing these details.
The new services and basic details are as follows:
- Apple TV + – Subscription service with original stories from the most creative minds in television and film.
- Apple TV Channels – subscription service offering a la carte TV channels such as HBO.
- Apple News + subscription service with full access to hundreds of magazines and leading newspapers.
- Apple Card – Credit Card with Cash Back Bonuses and Apple Discounts offered via Goldman Sachs (GS)
- . Apple Arcade – a subscription service with over 100 games.
The key to this is that Apple is focusing on services that make sense to complement the end result, not just those that generate revenue. The tech giant focuses on original content via Apple TV +, but the channel concept is driving Apple's revenue from subscribing to certain pay-TV services compared to licensing the content and trying to make a profit by finding enough subscribers to cover costs. Apple only runs a $ 1 billion risk to deliver these original content services.
In areas such as gaming and news, there are still many unknowns where the separation with content publishers is unknown. These categories are not expected to move the pin, but Apple is clearly in a position to make a profit from these plans.
The key here is that analyst Gene Munster of Loup Ventures generates over $ 20 billion in revenue with these new services. The analyst firm splits the revenue opportunities as follows:
- Apple TV + / Channels – $ 15B
- Apple Arcade – $ 3B
- Apple Card – $ 1.5B
- Apple News + – $ 0.5B  The majority of revenue projections come from the video streaming services that were the highlight of the event , The Apple card has a unique interest because co-branded credit cards are usually very profitable.
Overall, Apple sees in Loup Ventures in five years, a turnover of $ 78 billion from services.
A big key This is the amount of gross margins generated by these new services compared to existing ones. Apple is one of the best companies that do not generate revenue to earn revenue. Most of the above services only include fees for Apple, without any costs of producing services such as Channels and Card.
In the December quarter, Apple released gross margins by business units to showcase the services unit with a division looking at the event on Monday. The gross profit margins for services during the reporting period were almost 63%.
Investors will be watching these margins closely throughout 2019 and 2020. Any discrepancy would be very negative However, there is a likelihood that Apple will maintain Services gross margins above 60%, generating an additional gross profit of more than $ 12 billion by 2023.
For full fiscal year 18, Apple generated $ 266 billion in revenue and $ 102 billion in gross profit. The gross profit margin was only 38%. This shows that switching to services does not have to be in line with product revenues in order to reward shareholders.
Keep in mind that Loup Ventures more than doubles the total revenue of services compared to the FQ1 level. This means that service revenue will grow by more than $ 40 billion compared to the years of GY18 listed above , Assuming that Apple retains gross margins for the division, gross margins from these high-margin offerings, including Apple Music, Apple Pay, and the Internet, can be expected to increase by $ 25 billion.
Basic EPS Estimates
My previous research highlights how Apple would surpass the EPS targets below. According to analysts, Apple only earns $ 11.43 per share this year, after reaching $ 11.91 in fiscal 18.
The offers of the services have determined the company up to a higher of my higher estimates.
The most important factor for investors is that analysts continue to extrapolate in the weak FQ1 quarter. Investors should expect Apple to recover by boosting to gross margins on higher margin products such as these new services and earnings from wearables such as the new AirPods 2.
The combination sees the tech giants looking even better as long as the stock is still trading above $ 45 from their highs. At $ 188, the stock only trades at an EV of 12x current estimates for fiscal year 20, and I expect the numbers based on these catalysts to increase significantly.
Disclosure: I am / we are long AAPL. 19659038] I wrote this article myself and expresses my own opinion. I can not get any compensation for it (except from Seeking Alpha). I have no business relationship with a company whose shares are mentioned in this article.
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