Needham & Co analyst, Laura Martin, set the cat among the pigeons this week with her latest Apple analysis, calling it “an arms dealer that dominates the wealthiest segment” of the smartphone industry. It’s an extensive and extremely interesting report, and I’ve glanced through it to cherry-pick a few ideas.
Martin’s not talking about weaponry, of course. She’s simply pointing out Apple’s dominant position in the emerging global ecosystem for content and intellectual capital distribution.
Martin rejects the thesis that claims Apple stock should only reflect its device sales, arguing that it has other traits to reinforce the company value. It could, for example, be valued in the same way as a media company, reflecting its fast growing content, software and services income.
That’s interesting because Apple is not a boring box shifter like any other consumer electronics company (Huawei or Samsung, for example). It sells an experience and builds incremental income around that sale.
Apple customers are loyal, active and engaged. They maintain on average 1.3 devices and are prepared to pump their cash into the experiences the company provides. They also stick with the company for an average of at least eight years, meaning you can look at its business as also being a subscription business.
“Our survey research concludes that iOS platform churn is only about 12% annually, suggesting fewer competitive pressures, higher pricing power, more predictable revenue streams,” the analyst wrote.
Despite the company’s focus on innovation its income is not dependent on a hit product, because it has built an insanely strong ecosystem of loyal customers who will stick with the company, buy iterative upgrades and use its additional products and services.
(The analyst explains this as meaning Apple is more like Harry Potter than Pixar, with the former building a big business through sequel releases and the latter being dependent on all-new product offerings).
Needham & Co, estimate that the company’s customers stay in the iOS ecosystem for an average of eight years, and that 88 percent of those who upgrade their devices annually stick with Apple’s products. The analyst also estimates Apple generates an average $234/year/device on the billion devices already in the wild.
On platform churn, Martin notes that both Android and iOS users tend to stick with their platform choice, with one crucial exception: Where churn is visible its in the direction of people beginning to use smartphones on Android devices because those devices are cheaper, and then migrating to iPhone once they understand how useful smartphones are to them.
One big difference between uses on both platforms is that the average household income of an iPhone owner is 47% above that of the average Android phone owner, the analyst claims. This means Apple has attracted high-end consumers who are most engaged in making use of these mobile products.
These loyal, engaged and relatively wealthy consumers are also extremely likely to buy other Apple products and are also far more willing to invest in apps, content and other items.
“The growing monetization of its 1B installed base of devices should be a key value driver of AAPL’s future value, which may be underestimated by Wall Street.”
“We believe platform or ecosystem churn - not device churn - is the right way to think about the value of Apple. If platform churn is lower than consensus estimates, this implies that Apple has higher pricing power, stronger downside protection (i.e., less risk) and more upside when Apple gets it right with a new product introduction. Loyalty to Apple’s ecosystem adds value to shareholders, we believe.”
On choice, Martin notes:
“Finally, with 24,000 active Android smartphones on the market globally, we think Android is a victim of a “tyranny of choice,” which confuses consumers and works against Android, especially at the high end. AAPL benefits from far simpler choice sets, typically three to six choices/device.”
So how much is Apple worth? The analyst took four different analytical approaches that suggest the following values:
- Ecosystem Loyalty Valuation ($180/share)
- Income Statement and Balance Sheet fundamentals ($200/share)
- Hits versus sequels (Apple’s iteration) ($170/share)
- Profit per device over time ($168/share)
Assigning a $150 target, the analyst cited, “strong brand loyalty results in lower competitive pressures, higher pricing power, more predictable revenue streams, and a halo effect that drives sister-device sales.”
I have to say I think this is one of the more significant Apple analyses I’ve seen in some time, I imagine it will prove as prophetic as the great Charles Wolf’s prediction that iPod sales would drive growth across the rest of Apple’s business.
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