Apple’s Services Business Is Growing Like The ‘FANG’ Stocks, Should It Be Valued Like One?

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Apple’s Services business has also seen robust growth, emerging as the company’s second largest segment in terms of revenue. Apple’s Services revenues grew by 21% in calendar year 2016 (the company’s fiscal year ends September 30) to a little over $25 billion, making it almost as large as Facebook. However, Apple, and its Services operations, aren’t valued like other high-profile Internet companies such as the so-called “FANG” stocks – Facebook, Amazon, Netflix and Google (Alphabet). In this note, we take a look at some of the key drivers of Apple’s Services business and its valuation.

We have a $164 price estimate for Apple, which is slightly ahead of the current market price.

Why Apple’s Services Valuation Lags Other Internet Companies

We currently value Apple’s Services segment at about $150 billion (excluding Apple’s net cash position), using our discounted cash flow model. This translates to a forward revenue multiple of about 5x. This is well below Netflix (valued at ~7x forward revenues), Facebook (13x) and Google (6.3x). While this is partly due to slightly lower growth rates and potentially lower margins, there are also some other factors that limit Apple’s Services business from being valued like other Internet stocks. For one, Apple’s Services revenues are tied to the sales of its devices, and there could be a slowdown in sales if Apple’s hardware shipments falter. For instance, customers tend to buy the AppleCare plan at the time of their device purchases, while potentially loading up on more paid apps earlier in the life cycles of their devices. Moreover, Apple has been reluctant to leverage user data – which is extremely valuable for Internet companies – as it focuses on the privacy aspect of its devices. In contrast, Google, Amazon and Facebook have shown a willingness to work with user data from their search, e-commerce and social media operations to grow their businesses.

Apple Still Has Ambitious Plans For Services

Apple has set a target of effectively doubling its Services revenues by 2020 (~18% CAGR between 2016 and 2020). While the company has grown Services revenues at an average rate of around 23% per year over the last five years, driven by an expanding iOS user base (we estimate that the user base grew 3x between 2011 and 2016), it’s unlikely to see similar growth rates in its installed base going forward. Instead, the company will have to primarily rely on expanding its Services ARPU to meet its targets. We estimate that its ARPU (considering only iOS devices) stood at about $33 last year.

There could be multiple avenues for Apple to improve its services ARPU. Firstly, App store revenues are expanding, and there may be further scope for growth as Apple launches new developer kits such as the augmented reality-focused ARKit, which could enable a richer Services experience. Apple also earns a commission (typically 15% to 30%) from third-party subscriptions on its platform, and it could be a big beneficiary of trends such as cord cutting and a shift towards streaming music services. For instance, the number of paid subscriptions on its platforms, including both Apple and third-party services, now exceeds 185 million, marking an increase of 20 million in the last three months alone. The Apple Pay business could also see revenues accelerate (albeit from a very small base) over the next few years, as Apple has already done much of the heavy lifting in terms of building out the requisite infrastructure in many developed markets. The company’s push to capture more budget-conscious users with devices such as the $329 iPad and the iPhone SE could also help it to expand its installed base and, in turn, drive Services revenues. While we expect the Services business to be a major driver of the company’s long-term growth, its relative discount compared to the “FANG” companies does seem warranted.

 [Source”timesofindia”]

Office 365 is king of business web apps, but Slack is growing fastest

Office 365 is king of business web apps, but Slack is growing fastest

Which is the most popular business app used online? Unsurprisingly, it’s Office 365, the subscription version of Microsoft’s productivity suite, according to some new research which details the most-used web apps.

These figures were revealed by Okta, a firm which produces software to manage employee logins to online services. The company found that among its customers, Office 365 was king of the enterprise cloud apps, followed by Salesforce.com, Box, Google Apps for Work, and in fifth place was Amazon Web Services.

Okta also made an interesting observation regarding Office 365 and Google Apps both being used within the same organisation. Indeed, data showed that over 40% of companies use both of these services due to preferences for one or the other in different departments.

Not slacking

As for the fastest growing business app, that was Slack, which witnessed a growth rate of 77% in the second half of 2015. We can expect Slack to put in a very good showing this year, by all accounts, as it’s continuing to pick up the pace with “no sign of slowing down just yet” Okta says.

Adobe’s Creative Cloud also had a good year in 2015, growing its user numbers by 44% according to the report.

One final nugget on business security for you: Okta found that 30% of organisations are now using multi-factor authentication, a number that still needs to increase in an ideal world.

[Source:- Techrader]