Why Apple’s New Streaming Service Could Be Worth $60 Billion or More to Shareholders

March 21, 2019 by Jon C. Ogg

Source: laflor / Getty Images
Wedbush Securities has been quite positive on Apple Inc. (NASDAQ: AAPL) over time, continually being above the consensus price targets. The firm’s Daniel Ives has an Outperform rating for the technology giant, but he now sees Apple being worth billions of dollars more based upon what he expects to come from the press event on Monday, March 25, when Apple is set to unveil its long-awaited streaming video service. That service is Apple’s answer to competing against streaming media giants Netflix, Disney, Hulu and others.

Ives raised his $200 price target to $215. A price target being raised by 7.5% might not seem exceeding aggressive on the surface, but when you are talking about a company worth almost $900 billion, that is more than $60 billion in added value. And that $60 billion in added value in market capitalization would be more than the entire market cap of over 80% of the S&P 500.

Note that Ives has been much more bullish on Apple in the past than the more recent target. He once had a $310 price target in 2018, which was lowered to $275 last November to reflect reduced estimates and softer near-term iPhone data points. Ives then joined other Wall Street analysts in trimming that target handily, to $200, after Apple’s early January warning.

Ives said of Apple’s coming release:

We view this as a pivotal step for Cupertino in further driving its services flywheel and entering the “streaming content arms race” which is clearly starting to take form. While the first step in this video content framework will be its announcement on March 25th and adding content partners (likely Apple will get a 25%-35% cut of monthly subscriber fees), we believe this will only be the drumroll to a more transformative content acquisition during the course of 2019 for Apple. We believe Monday’s announcement is just the tip of the iceberg for Cook’s broader streaming content strategy to take hold and in our opinion adds a significant potential catalyst to the Apple services growth story for years to come.

Another issue is the services business, for which so many other analysts and investors have been holding high hopes. Ives estimates that the valuation of the services franchise for the company is worth roughly $400 billion on a standalone basis. He sees this as a highly profitable segment with revenues north of $50 billion by fiscal year 2020.

Ives also sees the new streaming video content service launching this fall with a slew of content partners and original content. Noted deals are with Oprah, Reese Witherspoon/Jennifer Aniston, Steven Spielberg and others. Apple is said to be spending roughly $1 billion on original content this year alone.

And the expected mass? About 100 million potential subscribers over the next three to five years. That said, Ives does note that the Apple streaming service is late to the market:

However the company is definitely playing from behind the eight ball in this content arms race with Netflix, Amazon, Disney, Hulu, and AT&T/Time Warner all going after this next consumer frontier investing significantly more dollars ($20 billion combined and counting per annum) on content. While acquisitions have not been in Apple’s core DNA, the clock has struck midnight for Cupertino in our opinion and building content organically is a slow and arduous path, which highlights the clear need for Apple to do larger, strategic M&A (a24, Lionsgate, Sony Pictures, CBS/Viacom, Netflix, MGM) around content over the coming year to “double down” and drive the services flywheel especially with its new video subscription service set to be rolled out.

Ives believes that the opportunity could translate into a $7 billion to $10 billion annual revenue stream for Apple over time. This would also further cement Apple’s installed base and halo effect. As for the price hike, that comes from the added value in a sum-of-the-parts valuation of Apple.

Apple shares closed up 0.87% at $188.16 on Wednesday and were indicated up 0.5% at $189.26 on Thursday. Its 52-week trading range is $142.00 to $233.47, and its consensus target price is lower than the current price at $180.85. The street-high price target is still up at $245.

I'm interested in the Newsletter