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Goldman: Buy Apple Because It's Becoming a Services Company

Goldman: Buy Apple Because It's Becoming a Services Company

By    |   Wednesday, 18 November 2015 11:53 AM EST

It's time to stop thinking of Apple as a hardware company and start thinking of it as a service company.

At least, that's what Goldman Analyst Simona Jankowski and her team are telling clients as they add the stock to their "conviction buy" list and call for a price of $163 in the next 12 months, Bloomberg reported.

Apple stock closed Tuesday at $113.69 and was at $117 at midday Wednesday.

"We expect that over the next year, the focus will shift from unit growth (which is slowing given a maturing smartphone market) to installed base monetization and recurring revenues (“Apple-as-a-Service”). Apple’s model has already tilted that way with its new iPhone 6s installment plans, and we see the upcoming TV service as a powerful next step," Jankowski said.

Due to Apple's large and loyal customer base, the team argues that there is a "significant multi-year opportunity" for the tech giant to boost monetization. Jankowski's team estimates that over 90 percent of those purchasing iPhones are repeat customers, which will make it much easier for Apple to become a service-like company, especially as it launches a TV service.

The timing might prove perfect for a foray into the TV space as well, with Goldman pointing towards acceleration in cord cutting as millennials are more apt to use what it refers to as "over-the-top media consumption," and the skinny bundles such as Sling TV and Vue become more common. 

"Theoretically, Apple could transition other products to installment plans as well, and charge customers a monthly bill that also includes its other services such as Apple TV and Music. We think a potential live TV service from Apple would be a key enabler of this transition to an “Apple-as-a-Service” business model," Jankowski said.

The shift to a service model could prove to dramatically increase Apple's average revenue per user (ARPU). Jankowski estimates that Apple's current ARPU would be $42 operating with a service business model. 

In the future, this could snowball into $153 per customer every month. The team doesn't expect it to hit this in the near- term given that the majority of customers would not use all of its platforms, but they said they wanted to show this figure "for perspective on the multi-year upside available to the company, especially relative to investor concerns that it has reached saturation and is going 'ex-growth.'"

The team then puts it all together and argues that if you assume a $153 ARPU for the U.S. and $50 for the rest of the world, you arrive at a maximum revenue of $553 billion for 2017. To put that into perspective, consider that Apple's revenue for fiscal year 2015 is $233 billion.

Basically, Goldman is saying that there is plenty of room for growth, even if hardware is slowing down.

Goldman touted Apple stock just days after it was revealed that top U.S. hedge funds trimmed their positions in Apple Inc during the third quarter, when shares of the iPhone maker fell sharply.

A filing with the U.S. Securities and Exchange Commission released on Monday showed that Adage Capital Partners held 8.5 million Apple shares on Sept. 30, down 4 percent from June 30, Reuters reported.

Other filings showed that Appaloosa Management held 1.3 million Apple shares as of Sept. 30, down from 2.5 million shares on June 30; that Bridgewater Associates held 274,852 Apple shares as of Sept. 30, about half as many as three months earlier; and that Coatue Management LLC owned 6.8 million shares on Sept. 30, twenty percent fewer than in the prior quarter.

Also, Nevsky Capital reported holding 908,156 Apple shares at Sept. 30, compared with 2.6 million at June 30.

Tiger Eye Capital LLC, which held 356,502 Apple shares in June, held none in September.

(Newsmax wire services contributed to this report).

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It's time to stop thinking of Apple as a hardware company and start thinking of it as a service company.
apple, goldman sachs, stock price, buy shares
Wednesday, 18 November 2015 11:53 AM
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