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Alex Cho

Amit Daryanani Raises Apple Price Target to $155 on Service Revenue Contribution

Amit Daryanani upped his price target last week from $140 to $155, in a note released to sell-side clients. Generally speaking, his stance on service revenue conforms to the Street View, and his price target is more or less in-line with street consensus estimates of around mid-$150s on Apple shares.

The analyst anticipates service revenue will require some M&A activity to double by FY’20 absent of meaningful ARPU growth. Though, ARPU could surprise given increased storage size, and Apple’s transition to higher base storage, so the installed base can consume more app content on devices.

Here were the key highlights from the RBC Capital Markets report:

AAPL expects Services to be the size of a F100 company by FY17 (~$28B in revenues) and double by FY20 ($48-50B size). This implies AAPL anticipates 18% Services CAGR over the next 4-years (vs. 21% historical 5-year CAGR). Furthermore, assuming the install base grows by ~8%, it would imply either ARPU growth is 10% or AAPL needs to do sizable M&A to achieve their target. If growth is organically driven by ARPU, we could see that as a powerful driver for multiple expansion.

Currently in the $24B Services portfolio, we estimate the largest components are A) App Store ($8.5B, or 3.9% of total revenues), B) iTunes/Apple Music (~$5.5B, 2.5%), C) AppleCare & Services (~$4.1B, 1.9%), D) Licensing & Other including iCloud, Apple Pay, iAd, and the Genius Bar (~$5.9B, 2.7%). We would note AAPL reports App Store revenues on a “net” basis (post 70% payout) significantly understating their revenues vs. peers.

The service revenue breakdown is fairly helpful, as it helps to articulate where exactly the service/software business could generate upward earnings/sales momentum. That being the case, I take on a more conservative stance on Apple’s software/service revenue primarily because the business would need to exhibit above historical growth to reach $50 billion in size. Assuming ARPU contributes meaningfully, the business would reach Tim Cook’s growth target, but absent of reasonable evidence of growth inflection, I’m not willing to model rev. growth acceleration in the service/software unit.

I continue to reiterate my high conviction buy recommendation and $156 price target.

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