NEW YORK (TheStreet) - Apple (AAPL) - Get Apple Inc. Report recently announced the launch of its iAd advertising platform, which will help developers monetize free iPhone, iPod and iPad apps. We've updated our Apple analysis for the iAd platform and combined it with our existing forecast for the paid apps business of Apple. We now have a Trefis price estimate of $294 for Apple's stock, up from our earlier estimate of $267.
We estimate that Apple's apps business, which includes paid and ad-supported apps, accounts for about
. In comparison, we estimate that Apple's new iPad business accounts for only about 4% of Apple's stock.
iAd: An Advertising Platform for Monetizing Free Apps
iAd is Apple's advertising platform for apps on the iPhone, iPod Touch and iPad. iAd allows developers to embed ads within free apps. The app developer gets to keep 60% of the gross ad revenue while Apple gets the rest.
Four Important Drivers Determine iAd's Valuation
We valued Apple's iAd business based on four important drivers:
1. Revenue per Ad Impression
The amount of money made from each ad impression is a key determinant of how much Apple earns from the iAd platform. We estimate that the average
and that this will decline to around $7 per ad 1,000 impressions by the end of Trefis forecast period.
We believe there are two reasons why ad rates for free apps will decline:
(i) More apps will lead to higher ad inventory and declining ad rates
As the number of free apps available increases, competition amongst apps for advertising will lead to a rise in the available ad inventory and to declining average revenue per ad impression.
(ii) Future growth likely to be driven from low monetizing international markets
The mix of iPhones, iPod Touches and iPads in international markets will grow over time. Emerging markets typically have lower ad monetization rates compared to the US and other developed international markets. The rising mix of emerging markets ads will bring down overall average ad rates.
2. Number of iPhone, iPod Touch & iPad Devices in Use
We estimate that Apple sold around 38 million iPhones and iPod Touch devices in 2009, and that there were a total of
. We believe that sales of iPhones, iPads and iPod Touch devices will increase to 70 million in 2010 and that there will be 100 million devices (iPhone, iPad, iPod Touch) in use in 2010. The devices in use determine the potential ad base for free applications that feature ads.
We expect around 340 million devices in use by the end of Trefis forecast period.
3. Ad Impressions per Device
We believe that
and that this number will increase slowly to around 340 by the end of Trefis forecast period.
We believe that more apps will translate to more app choices for users and that users will spend even more time on apps. However, there is a risk that excessive advertising could discourage further free app use and that there could be a downside to our ad impression forecast.
4. Apps Gross Profit Margin
has been 30% from 2008 to 2009 since Apple only gets 30% of the paid apps revenues. The remaining 70% goes to the app developer.
With the introduction of the iAd platform in 2010, we expect iPhone, iPod Touch and iPad Apps Gross Profit Margin to jump up to nearly 38%. Through iAd, Apple will get a cut of 40% of iAd gross revenues while the rest goes to the app developer. Since we expect Apple's revenues earned through the iAd platform to be much more than through paid apps, the increase in average app gross margins is significant.
You can modify our forecasts for
above to see how Apple's stock will be impacted in different scenarios.For additional analysis and forecasts, here is
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