Goldman Sachs: Search revenue is gaining on the App Store

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Fast as App Store revenue is growing, says analyst Rod Hall, the money Google pays Apple to be its search engine of choice is growing even faster.


From a deep dive into Apple Services that landed on my desktop Sunday night:

app store TACBased on the output from our TAC [total acquisition costs] model, we conclude that TAC revenue for AAPL is likely to be ~$9bn in 2018, which we believe from our conversations with investors is materially above where consensus is (~$5bn-$6bn). We also believe TAC growth should continue to be robust given ever increasing search intensity even as the rate stabilizes after recent increases associated with Siri…

We estimate n ~31% of Services revenue in 2018 will be generated from App store sales, 24% from Search TAC, 17% from AppleCare/repair services, 8% from iCloud, 8% from Apple Music and the rest 12% from other services. We expect the contributions from Apple Music and Search TAC to Services to grow through 2020, while App Store’s contributions could remain stable.

Maintains Neutral rating and $240 price target.

Note: Although “total acquisition costs” contains the word “cost,” the cost is (mostly) Google’s. To Apple, TAC is revenue.

Below: Hall’s App Store and TAC spreadsheets (click to enlarge).

app store TAC

app store tac

My take: Apple’s services revenue stream is full of surprises.