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.


UK stocks and pound keep to recover

Trader in London

uk stocks and the pound have persevered to regain some of the ground lost within the wake of the Brexit vote.

After rising 2.6% on Tuesday, the FTSE 100 percentage index changed into up 2.2% at 6,277.forty one by noon.

The pound rose 0.75% in opposition to the dollar to $1.3443, although sterling nevertheless remains well underneath tiers reached before the referendum.

Analysts also warned that the rally of the past couple of days is probably quick-lived.

stocks and the pound are continuing to company but the publish-Brexit fact will bite sooner or later,” said Joe Rundle, head of trading at ETX Capital.

“What we are seeing in the FTSE is wish in Britain being able to trip it out by ultimate part of the single marketplace. This seems like wishful thinking.”
The market actions come as eu Union leaders are meeting for a 2nd day at a summit in Brussels.

The leaders are collecting with out the United Kingdom after its vote to go away the bloc. On Tuesday, David Cameron stated endured change and safety co-operation with the eu could be vital.
Over the worst?

The pound had risen as excessive as $1.50 on Thursday as buyers anticipated a ‘remain‘ vote, however by using Monday it had plunged to a 31-year low in opposition to the dollar.

Sterling rose zero.four% in opposition to the euro on Wednesday to about €1.21. earlier than last week’s referendum it were buying and selling around €1.30.
on the near of alternate on Thursday last week, the FTSE one hundred stood at 6,338.10. but, within the volatile exchange following the referendum end result the index had dropped 5.6% by means of the cease of Monday.

The FTSE 250 – which contains extra uktargeted agencies – slumped thirteen.7% inside the two buying and selling periods following the referendum end result. On Tuesday, it rose three.6% and the index was 1.9% better on Wednesday.

shares in Asia persisted to upward push on Wednesday, and inventory markets throughout Europe have been additionally better. Germany’s Dax index rose 1.eight% at the same time as France’s Cac forty changed into 2.5% higher.

Joshua Mahony, marketplace analyst at IG, stated: “there may be a self assurance within the city that perhaps the implications to this vote won’t be as immediate nor a ways achieving as many first of all thought, imparting opportunities for good deal hunters to seize shares at a reduction.

however, he introduced: “The big query is whether or not the worst is over, and the solution is unlikely to be sure.

“Sentiment is almost totally dictated by means of unknown portions for the approaching months or even years, in which the next most important occasion coming while or if article 50 is enacted.

“As such, having this type of lengthy length with this enormous cloud striking over financial markets will be not likely to assist confidence and risk appetite.”
stocks in the economic region – which had been especially difficult-hit inside the wake of the referendum – persevered to get better, with Prudential up 6% and Barclays three.2% higher.

The will increase got here no matter credit rating agency Moody’s slicing its outlook on the UK banking area to “negative” from “solidpast due on Tuesday.

Moody’s also downgraded its outlook on the ratings of some of uk banks and insurers.

After losing some ground on Tuesday, the fee of gold edged up zero.4% to $1,317.50 an oz.

Gold is viewed as a safe asset in times of uncertainty and the rate of the precious metallic hit a twoyr high on Friday inside the wake of the referendum result.

government bonds also are taken into consideration safer investments. The go back on uk authorities bonds on Wednesday remained close to the report low reached on Monday, while the yield from a tenyr gilt dropped beneath 1% for the first time.

demand for government bonds rose after the referendum. This pushed up bond costs, and whilst the price of bonds rises their yield falls.

Retail, mining, pharma stocks rally to boost FTSE

A man walks through the lobby of the London Stock Exchange in London, Britain August 25, 2015.  REUTERS/Suzanne Plunkett

Britain’s top share index edged higher on Thursday, boosted by rises in pharmaceutical and mining stocks, while retailers were also in favour after a well-received update from Marks and Spencer (MKS.L).

The FTSE 100 was up 32.00 points, or 0.5 percent, at 6,193.63 by 0930 BST, rising for a second straight session though the index is roughly flat so far in April.

Marks & Spencer (MKS.L) rose 1.4 percent in strong volumes of 70 percent of its 90-day average, after it posted a decline in sales that was less severe than expected.

Traders took heart from new Chief Executive Steve Rowe’s pledge to turn around its ailing clothing division, as well as continued strength in its better-performing food division.

“He is an executive that we are minded to back, one with the commitment, energy and insight to demonstrably take M&S on a better course, something for which long-standing shareholders’ pine,” said Clive Black, head of research at Shore Capital, in a note, retaining a “buy” rating on the stock.

Supermarket Sainsbury (SBRY.L) also rose, up 1.6 percent after being upgraded to “outperform” from “underperform” by Credit Suisse, saying the food retail sector is a recovery story and that the grocer’s bid for Argos-owner Home Retail (HOME.L) is “financially and strategically inspired.”

Miners were among top gainers, benefiting from favourable broker coverage as well as a steadying copper price.

BHP Billiton (BLT.L) and Anglo American (AAL.L) each rose 3 percent after JP Morgan lifted its target price on both stocks. Anglo American also benefited from a target price hike by Credit Suisse.

AstraZeneca (AZN.L) rallied 2.2 percent, taking gains over the last two sessions to 6.7 percent and lifting shares to their highest level since February.

Pharmaceuticals saw demand on Wednesday after Pfizer (PFE.N) pulled out of a deal to buy Allergan (AGN.N), stoking rumours of fresh deal-making in the sector.

Fuelling demand for AstraZeneca on Thursday was an upgrade by Societe Generale, who lifted their target price and maintained a “buy” rating late on Wednesday.

Top faller was Pearson (PSON.L), down 5.1 percent as it traded without entitlement to its latest dividend payout.

Worldpay (WPG.L) also fell, down 2.7 percent to 275p after a top shareholder in the payment processor sold part of its stake for 269p.

The stock had traded well over double its 90-day average by 0830 GMT.


[Source:- Reauters]