Here's Why You Should Buy Apple, According to Goldman Sachs
Change is afoot at Apple (AAPL) - Get Report , and Goldman Sachs is impressed.
Goldman added Apple to its conviction buy list on Wednesday, noting the tech giant's transition from pure hardware company to a more service-based and subscription play. Analysts pointed to what they perceive as a multi-year opportunity for the firm to increase monetization, listing the stock's return potential at 43%.
"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,'" analyst Simona Jankowski wrote in a research note. "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."
In the past, Apple CEO Timothy D. Cook has referred to Apple as more than just a hardware company, and it seems as if Wall Street is finally taking notice.
Goldman estimates that by December, there will be about 500 million iPhone users and 1.4 billion Android users. And as market saturation approaches and land grab slows, the smartphone landscape is transforming, as is the way companies make money.
Apple has an incredibly loyal user base (about 90% of iPhone buyers are repeat purchasers). Its services like iTunes, Apple Music and Apple Pay, which are consumable across Apple devices, bind users to the Apple ecosystem even further.
As a result, the company gets a unique advantage over competitors and builds a recurring relationship with customers.
Apple isn't lost all of this and is in fact seeking to capitalize on it. In September, it unveiled a new leasing program, the Apple Upgrade Program, which is essentially an installment plan for customers to upgrade their phones annually. As TheStreet noted at the time, the move essentially turns the company's business model upside down by transforming it into a subscription format.
The rewards the company could reap from the change are big.
According to Goldman, Apple's recurring revenue framework could boost its average revenue per user (ARPU) to $153 per customer per month from its current estimate of $42.
Analysts warn, however, that ARPU is not likely to hit its benchmark in the near future but consider it "perspective on the multi-year upside available to the company." It is worth noting that the estimate also assumes every iPhone user utilizes all other Apple devices and services.
The installment program will also help Apple to sell more iPhones by upping the sale of refurbished phones in emerging markets, lowering the barrier for entry-level consumers by eliminating up-front payments, and shortening the upgrade cycle.
Goldman anticipates the base of iPhone users will reach 700 million by 2017.
The firm also points out that Apple's base is an especially lucrative one, compared to its Web 2.0 peers like Alphabet'sGoogle (GOOG) - Get Report (GOOGL) - Get Report , Amazon (AMZN) - Get Report and Facebook (FB) - Get Report and is actually more akin to wireless operators like Verizon (VZ) - Get Report and AT&T (T) - Get Report . In the future, Apple customers' bills may start to look more and more like their wireless ones.
"Starting with the installment plans on the iPhone 6s, Apple now has a monthly billing relationship with its customers for hardware, which could extend to other products and services over time. Indeed, as the shift of media consumption (TV, video, music) to an over-the-top subscription model accelerates over the next three years, we expect Apple to capture a chunk of the monthly consumer spend on media, and monetize it further through recurring hardware sales," analysts wrote.
They pointed to the Apple TV service as well, which is expected to launch in 2016 after being delayed this year when negotiation talks for licensing programming and content took longer than expected. When the service arrives, Goldman thinks the impact could be big.
"We think Apple is in a unique position to offer a combination of Live TV and video-on-demand for its hardware ecosystem, including primarily the Apple TV with potential availability on the iPhone or iPad through an app," analysts wrote.
Calling the $100 billion pay-TV industry "ripe for disruption," Goldman pointed to a potential "skinny TV bundle" offering fewer channels than traditional packages as perhaps especially appealing.
Apple also has the advantage of apps, which CEO Tim Cook said were "the future of TV" at the September unveiling of the Apple TV. "Apple can position its TV app store in the middle of a two-sided market: consumers who are looking for content (which can be provided cheaper a la carte vs. the TV bundle for those who have a few favorite channels) and content creators who are looking for new distribution channels as the Pay-TV subscriber universe shrinks," Jankowski wrote.
This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.