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Alex Cho

Apple Ecosystem In Expansion or Contraction?

UBS came out with an interesting graph/study on the topic of Apple yesterday where they try to breakdown the installed base contribution to annual revenues/earnings. UBS analyst Steven Milunovich basically assumes that the rate of growth in the installed base, and spending per user will eventually stabilize contrary to what’s currently being priced into the stock (terminal value assumptions differ in the current market value as opposed to what Milunovich is trying to illustrate).

Steven Milunovich from UBS goes onto mention:

We forecast that the amount spent per user will continue to decline in F17 because the installed base is growing faster than revenue. However, we remain relatively confident in a stabilization of revenue per user over time. Figure 5 details a breakout of "classes" of Apple users, which yields average revenue per user over six years of $339. Note that the average services revenue per user has been around $40-50 per year for the last two years and is used as an assumption going forward.

He then goes onto state market expectations differ from what’s likely to occur:

We think investors are pricing in a gradual flattening of the installed base by F19 and a decline in the amount spent per user to around $313. Obviously, there is some leeway in a DCF to be wrong on either side, but negativity generally seems to be priced in.

While I agree with some of what Milunovich states in his research report, I believe the market is discounting shares on short-term weakness in fundamentals, as opposed to long-end projections on installed base/earnings growth. It’s hard to tell if Apple can monetize its ecosystem with greater success beyond software, services and peripherals. However, it’s worth noting that consumers are preferring to upgrade devices less frequently, and aren’t adopting newer devices quickly enough to offset the shift in upgrade cadence.

So, the Apple Watch and Air Pods alone may not be enough to sustain higher revenue per Apple user, but I guess I’ll explore those two topics at a much later point in time.

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