Apple Inc. (AAPL) can unlock growth and boost its share price by copying Netflix Inc.'s (NFLX) highly successful movie and TV subscription model, according to Bernstein's Toni Sacconaghi in an interview with CNBC. Sacconaghi's new price target is $195, according to CNBC, up around 13% from the stocks's price in daily trading just after noon today.
Year to date, Apple shares are up 49%, but are down nearly 1% over the past month in early afternoon trading. The stock is trading at a 18.39 twelve month trailing price-to-earnings ratio (P/E ratio) compared to the 21.30 P/E ratio of the Technology Select Sector SPDR ETF (XLK). (To read more, see: Apple Will Beat The Skeptics and Rise 27%: Guggenheim).
New Model for Higher Multiples
Sacconaghi says Apple is trading at a huge discount. If the company copied Netflix's model, he says the stock would start trading at higher multiples. That means Apple needs to abandon its current “transactional selling model” and adopt a “subscription based model,” argued the Bernstein analyst in a December 6 CNBC story.
It's unclear whether leasing hardware such as iPhones and iPads would prove as successful as Netflix's monthly leasing of films and TV shows. Netflix offers month-to-month subscription services that provide unlimited access to streaming video content, and can be canceled at anytime.
Needing a Boost
A reassessment of Apple's current business model might seem attractive to some investors. The reason: the iPhone, Apple’s mainstay product, was also its weakest growing business during the last quarter. It contributed only 1.5% to the tech giant’s overall growth, according to CNBC.
Following a subscription model, Apple’s customers could lease physical wares such as iPhones, iPads, and Macs, as well as services like iCloud and Apple Music. All of this could be offered for a low monthly membership fee, which would include future updates and hardware upgrades. Such a model would allow Apple to “lock in recurring revenue streams and freeze the length of replacement cycles,” says Sacconaghi. (To read more, see: The Economics of an iPhone (AAPL)).
While Apple could benefit from adopting a Netflix-style subscription model, they may get a little help from the Republican tax plan. Sacconaghi estimates that if the corporate tax rate is reduced to 20%, the company could experience an 18% boost in its earnings per share (EPS).