Apple tries to be both desirable and predictable

FILE PHOTO: A customer stands underneath an illuminated Apple logo as he looks out the window of the Apple store located in central Sydney
FILE PHOTO: A customer stands underneath an illuminated Apple logo as he looks out the window of the Apple store located in central Sydney, Australia, May 28, 2018. REUTERS/David Gray/File Photo/File Photo

NEW YORK, Feb 2 (Reuters Breakingviews) - Companies from General Electric (GE.N) to Goldman Sachs (GS.N) know one key to a higher stock-market valuation is producing recurring, stable, fee-like revenue. The same goes for Apple (AAPL.O). The $2.4 trillion iPhone maker’s shift from devices to less tangible services, which made up 18% of its revenue in the latest quarter, has pushed up its valuation. But not all of its offerings are equally valuable.

As Apple has shifted toward more services, its desirability has risen. In 2018, the company’s enterprise value was equivalent to 3 times estimated revenue for the year ahead, according to Refinitiv. Today, at $2.5 trillion including net debt, Chief Executive Tim Cook presides over a firm valued at 6 times sales.

One way to make sense of that is to break Apple’s valuation into parts. Analysts assume Apple will sell about $300 billion in iPhones and other objects this year. While the devices have changed, the business hasn’t much, so assume that chunk of business is worth around 5 times sales – still handsomely above Apple’s historical average – or around $1.5 trillion. Deduct that from Apple’s enterprise value, and investors are pricing the services business at $1 trillion, around 10 times forecast revenue.

That’s more than Microsoft (MSFT.O), which trades at 8 times and whose revenue growth is similar and remarkably consistent. Whether it’s justified, though, depends on what services Apple is peddling, and how steady and subscription-like they are. Gaming and advertising, for example, may become blockbuster businesses, but are more impacted by economic weakness than music subscriptions or cloud backup.

Apple doesn’t break out how much revenue comes from what source, but it matters. Cyclical services are typically valued less richly, even if they are growing quickly. Alphabet (GOOGL.O), the ad-dependent parent of Google, and gaming company Electronic Arts (EA.O) are both valued at 4 times estimated sales. If 20% of Apple’s services are cyclical, for example, and investors put the same multiple of sales as those peers, the company's fair share price drops 5%.

That may sound like splitting hairs. But it isn’t, because services are an ever-greater part of Apple’s business: nearly a fifth of revenue today compared with less than 10% in 2015. Apple might be reluctant to disclose more, since regulators like European antitrust cop Margrethe Vestager are out to inject competition into digital markets. But if there’s one thing investors prize along with predictability, it’s transparency.

Follow @rob_cyran on Twitter


Apple said on Feb.2 that revenue for the quarter ending Dec. 31 was $117 billion, a decrease of 5% from the same period the year before. The technology company earned $30 billion, compared to $34.6 billion a year ago.

The iPhone maker said it faced significant supply constraints in the quarter. Covid-19 lockdowns in China hampered production of iPhones. Services revenue rose 6% to $20.8 billion.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

Editing by John Foley and Sharon Lam

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