Relatively low iPhone unit sales in the fourth quarter and disappointing guidance for the March 2018 quarter has once again raised concerns about the long-term growth potential of Apple Inc. (Nasdaq: AAPL). Investors looking for Apple’s next source of revenue growth are turning to the company’s services business, and Apple Music is one of its fastest-growing segments.
Apple’s Services revenue grew 24 percent in 2017, but Bernstein analyst Toni Sacconaghi estimates revenue from Apple’s streaming music service, Apple Music, increased by 91 percent on the year to about $2 billion. In fact, despite its relatively modest size, Bernstein says Apple Music contributed about 4.1 percent of Apple Services total growth last year. In just under two years, Apple Music has already amassed 36 million paid subscribers.
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Sacconaghi says revenue from Apple’s overall music business is currently declining thanks to dropping iTunes downloads. Bernstein estimates iTunes revenue may have declined by as much as 50 percent since 2014. Fortunately for investors, Apple Music is the type of subscription-based driver of average revenue per user growth that the market typically appreciates, Sacconaghi says.
“Looking forward, we estimate that Apple Music could grow by 70 percent in fiscal 2018 and 50 percent in fiscal 2019, contributing nearly 500 basis points per year to Services revenue growth and enabling Apple’s overall music business to become meaningfully accretive to Services revenue and ARPU for the first time in years,” Sacconaghi says.
Using competitor Spotify’s secondary market value of around $20 billion as a guide, Sacconaghi estimates Apple Music is currently worth roughly $10 billion, only about 1 percent of Apple’s overall market cap.
“Apple Music has half the users, appears to be currently growing at a slightly higher rate, and likely enjoys a higher ARPU [than Spotify],” Sacconaghi says.
The only downside to Apple Music’s growth is that its margins in the 18 to 20 percent range may weigh on the company’s overall margins. That type of low-margin business is typically not given a premium valuation in the market, a trend that is reflected in Spotify’s conservative valuation.
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Despite the high-growth opportunity for Apple Music, Sacconaghi remains cautious on Apple stock, which hit new all-time highs on Tuesday.
Bernstein has a “market perform” rating and $170 price target for AAPL stock.
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Apple Inc. (AAPL) Music Is Now Worth $10 Billion originally appeared on usnews.com
