“Services” Will Help Buoy Apple Stock
Mr. Market has not been paying attention to Apple Inc. (NASDAQ:AAPL) quietly building its services arsenal. From “Apple Music” to “Apple TV” and “Apple Pay,” Tim Cook is not leaving any stones unturned. Now, investors should keep tabs on another recent development that could prove a boon to AAPL stock in the New Year.
We all know that Apple has faced a lot of criticism for its reliance on the “iPhone” as its one and only big revenue driver. Bears believe the iPhone will, sooner or later, become a commodity, like any other smartphone, at which point, the company will face an inevitable downfall. What they miss is that Apple is successfully expanding its ecosystem by restructuring a part of Apple into a services company.
In fact, Goldman Sachs estimates that if Apple turns out to be successful in the services arena, the company could boost its average revenue per user (ARPU) from the currently estimated $42.00 to nearly $153.00 in the coming year—that’s more than a threefold increase. (Source: “Goldman Says to Buy Apple Because It’s Becoming a Services Company,” Bloomberg, November 18, 2015.)
Here’s What Tim Cook Is Cooking Up Next
Last year, when Apple bought Beats Music for $3.0 billion, we could only speculate what Tim Cook had on his mind. Come this year, the company launched its first radio channel on Apple Music, “Beats 1,” which was a massive hit. At that time, Apple made a deal with the record labels that the company will be allowed to stream the licensed content on not one, but five of such channels.
Fast-forward a few months and the pieces have started to fall in place.
Six months following the launch of Beats 1, the company has filed for trademarks for four more of such channels. Yes, a recent filing shows that the company is coming out with four new radio channels for Apple Music—“Beats 2,” “Beats 3,” “Beats 4,” and “Beats 5.” (Source: “Trademark Filings Point To More Beats Radio Stations Coming To Apple Music,” TechCrunch, December 28, 2015.)
Expect the company to use these channels to expand Apple Music’s international foothold. And to better understand how big this service will be, take a hint from the stats Tim Cook released for Beats 1.
During the first three months of its launch, Apple CEO Tim Cook reported 6.5 million premium subscribers who signed up for the basic subscription of $9.99. This means the company made a solid $65.0 million in revenue in the first three months alone. (Source: “Apple Music has a third as many paying subscribers as Spotify,” The Verge, October 20, 2015.)
Now, the service was launched recently so it is obvious that excluding those 6.5 million subscribers, the majority of Apple Music users have been using a free trial. But the new channels will certainly step up the service’s game in the premium music streaming industry, where Spotify currently enjoys leadership.
Nonetheless, Apple’s ultimate success will depend on its ability to successfully convert these trial users into premium subscribers, which I believe won’t be a tough nut to crack for Apple.
Long story short: the services side of Apple’s business could be a game-changer for AAPL stock in the coming year.