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Bank: “Apple moving from hardware to services”

March 29, 2021

By Chris Forrester

Investment bank Exane/BNPP has issued a comprehensive report on Apple and in summary says that the company is moving from its hardware roots to a platform player.

The bank has initiated coverage of Apple (with a “Buy” rating) saying that Apple has evolved from a hardware company to a platform play that cross sells services into a growing installed base.

“While the hardware business (iPhone, iPad, Mac) is maturing, we estimate stronger growth for the Services business (14 per cent sales CAGR FY20-25), which drives our FY21-23 estimates 3-7 per cent above consensus,” says Exabe/BNPP.

The bank admits that Apple’s share performance and P/E value might be considered expensive but is justified by Apple’s platform positioning with a growing share of Services. Further, given its annual Free Cashflow generation of c.$70 billion-$80 billion, the company could buy back an additional 16 per cent of shares in 2025.

“Apple is in a unique position of being able to drive Services growth by leveraging its 1.65 billion active user installed base. We estimate the installed base growing at a 9 per cent CAGR which, coupled with a 5 per cent ARPU CAGR, translates into a 14 per cent Services revenue CAGR to FY25. Driven by demand for Apps, iCloud, AppleCare and higher subscriptions, we estimate ARPU of $3.50 per month by FY25 vs $2.70 in FY20,” says the report.

Exane/BNPP reminds clients that it is widely reported in the media and in the supply chain that Apple is working on a VR Headset and AR Glasses. A VR headset could launch in 2022, followed by AR glasses in 2024. Assuming moderate success we estimate the VR Headset revenue opportunity at $3 billion or $0.7 per share. This compares to the AR Glasses revenue opportunity of $10 billion or $2.40 per share.

There’s another potential growth opportunity for Apple, says the bank. “The only potential product opportunity for Apple which could be as big as the iPhone is the Apple Car in our view. While the business model is not clear for now, we think an iCar will most likely involve Apple designing and developing its own vehicle and software, while outsourcing the manufacturing. This is supported by Apple’s Auto patent filings and also recent press reports (Bloomberg) that Apple is seeking manufacturing partners. It is likely that Apple would time a potential iCar launch with regulatory approval of L4 Autonomy around 2026. Assuming an ASP of $60,000 and 2 million units (2 per cent market share), this could represent a $120 billion revenue opportunity, i.e., as big as the iPhone.”

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