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Few app developers can afford to introduce friction to customer acquisition and payments, Morgan Stanley analyst Katy Huberty argues.
Drew Angerer/Getty Images
Investors appear to have regained their composure after a small-scale freakout over a court ruling that requires
Apple
to allow app developers to offer alternatives other than the App Store for making in-app purchases.
Apple shares fell about 3% Friday on the federal court decision. But the more analysts weigh the call, the less they seem to be worried about its long-term implications for Apple’s financial performance. The stock was marginally higher at $149.14 on Monday afternoon as attention shifts to Tuesday’s launch event for the newest iPhones.
As Barron’s noted on Friday, the app tracker Sensor Tower estimates that Apple had overall App Store volume of $72.3 billion in calendar 2020, generating $21.7 billion in fees, or about 7% of Apple’s overall revenues. But as noted on Friday, the investor and former Apple analyst Gene Munster thinks most developers will continue to rely on Apple’s payment platform; he estimates the maximum risk to Apple at about 2% of revenue and 4% of profits.
On Monday, another wave of analysts weighed in. Morgan Stanley analyst Katy Huberty said in a research note that Apple isn’t likely to allow developers to offer financial incentives for users to switch payment methods—a move comparable to gas stations offering a discount to customers who pay in cash.
She said very few of the more than 30 million app developers can afford to introduce friction to customer acquisition and payments, making those processes less seamless. The only risk, she says, involves the very largest developers.
Were Apple to lose all revenue from the top 20 developers, she estimated, the worst-case scenario would be a 2% hit to revenue and 5% reduction to earnings per share. The real risk is likely less than that, she said, maintaining a Buy rating on Apple shares.
Jefferies analyst Kyle McNealy said in a research note that the decision was “largely a win” for Apple, in that the company wasn’t deemed to be an illegal monopoly. He estimates the financial risk beyond 2023 to be about 1% of revenue and 4% of profits.
“Apple was not deemed to be an illegal monopolist and will not be compelled to allow side-loading of apps, accept other app stores, or lower its fee below 30%,” he wrote. McNealy maintained his Buy rating and target of $175 for the stock price.
Atlantic Equities analyst Ianjit Bhatti, too, argued that the impact on financial results is likely to be limited. “Crucially Apple will not have to allow third party app stores but is required to allow developers to direct consumer to alternative payment options outside the App Store,” he wrote. “Given the power of defaults and frictions associated with making payments off-app that the majority of consumers will continue to use Apple’s payment system.”
He also noted that Apple has ways to offset any lost revenue. Boosting the fees charged to developers by $200 a year, he says, would offset a 15% reduction in App Store payment revenue.
Cowen analyst Krish Sankar said that while profits could potentially take a hit of up to 10% as a result of the ruling, he doubts that will happen. Among other factors, the ultimate impact of the ruling will depend on the ability and willingness of developers to create alternative payment streams, and consumers’ willingness to adopt them.
Write to Eric J. Savitz at eric.savitz@barrons.com
