Morgan Stanley’s analyst team believes that Apple (AAPL) – Get Apple Inc. Report is on a potential path towards a $3 trillion market capitalization as the company considers a shift to a subscription-like model. The team sees big upside in Apple’s super sticky user base and says markets will need to reassess how they value Apple as it alters its core business..
Here’s a deeper look at Morgan Stanley’s thesis regarding how Apple can reach nearly $3 trillion in market cap by exploiting some of its key assets.
Figure 1: How Apple Stock Could Top A $3 Trillion Market Cap, According To This Expert
(Read more from Apple Maven: Apple Stock: Should Investors Worry About Price Target Cuts?)
A Shift To A Subscription-like Model
According to the Morgan Stanley analyst team (which will now have Erik Woodring assuming lead coverage, in place of long-time Apple analyst Katy Huberty) a sharp shift to a subscription-like model could add about $1 trillion to Apple’s market cap.
This value jump is driven by the high retention rates that Apple boasts thanks to its industry-leading position and its ecosystem of hardware and services.
The team sees Apple Services as becoming one of the most valuable technology platforms in the world, engaging everything from traditional communication to entertainment and beyond.
Apple Is Currently Valued As A Traditional Hardware Platform
Woodring believes that the market today is pricing Apple shares as if the company is a hardware technology platform. He points to the fact that AAPL trades at an enterprise value to free cash flow (EV/FCF) ratio of 22x – that’s compared to a 31x average for SaaS companies and a 44x average for subscription-driven streaming platforms.
As Apple’s install base matures and retention rates increase, though, the Morgan Stanley team argues investors will finally start to utilize a lifetime value (LTV) based valuation approach for Apple.
When such an interactive LTV model with discounted cash flow is used, it suggests a long-term valuation of $200+ per share, which would put Apple comfortably over a $3 trillion market cap.
Apple’s Efficiency In Acquiring New Users Is Gold
Erik Woodring also points out how effective Apple can be in acquiring new users. Seeing this quality as key to a strong subscription business, Apple’s lifetime value to customer acquisition cost (LTV/CAC) ratio is estimated by the Morgan Stanley team to be at 16x, which implies an impressive 16x return on customer acquisition cost.
Apple’s LTV/CAC ratio is well ahead of other giant streaming companies, such as Netflix and Spotify – these companies generally target an LTV/CAC of 5x.
Still, Morgan Stanley Trimmed AAPL’s Price Target
The latest rating comes from Katy Huberty, who offered a minor price trim before stepping away from her lead Apple analyst role. Huberty lowered her price on Apple shares to $180 from $185, saying that she won’t be “pounding the table” this time heading into the June quarter. She also warned that Apple could miss estimates.
According to Huberty, the reason for the slight target decrease is that high-income consumer sentiment is flashing caution signs. Plus, Huberty sees the foreign exchange market (FX) causing Apple to hike prices in some international markets.
Thus, the analyst believes that the consensus for FY23 revenues at $414.6B and EPS numbers at $6.51 remain too high. Huberty has set her targets for Apple at 1% and 4% below the FY23 consensus ($408.8B revenue and $6.22 EPS, respectively).
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Apple Maven)
