Apple Inc. (AAPL) used all of the showmanship at its disposal this week to debut four new ventures aimed at sharply boosting its revenue from services, including a new digital Apple Card, digital news offerings, streaming video games, as well as famous movie directors and stars introducing Apple TV+, which will offer original TV and movie content.
But the glow from Apple's media extravaganza may wear off quickly. Goldman Sachs in a new report says Apple's stock is poised to fall more than 25% as investors conclude that these new business lines will do little to reduce the company’s reliance on slowing iPhone sales, per a detailed story in Barron's. The hardware segment still accounts for over 60% of Apple's revenue, which is approaching $250 billion this year. The downbeat note comes as other investors say that Apple TV+ will suffer huge financial losses for years as it tries to build a streaming competitor from scratch that can rival Netflix Inc. (NFLX), Walt Disney Co. (DIS), Hulu, CBS Corp. (CBS) and others.
Why Apple's Digital Businesses Will Disappoint
- New digital ventures won't grow big enough profits to offset slowing iPhone sales
- Huge costs and losses to build Apple TV+ as viable rival to Netflix, Disney, Hulu
- New digital ventures will contribute minor profits to Apple's growing services business
- Apple Services will remain dominated by Apple Store commissions
Source: Goldman Sachs, per Barron’s
Apple's Weakening iPhone Business
Apple shares have risen nearly 20% this year, outperforming the broader market over the same period, as investors become more upbeat regarding its strategic shift to services. Yet Goldman views this sentiment as overly optimistic, given that core hurdles facing the company’s bread-and-butter business remain. “Though all of these services are interesting from a platform churn point of view none seem likely on our calculations to materially impact earnings per share in the short term,” wrote Goldman analyst Rod Hall, per Barron's. “With small calculated impacts from these ‘Other services,’ we expect the focus to return to the slowing iPhone business post this event.”
Equally as important, Hall says the new digital initiative also will have little impact on Apple’s services segment. That business is expected to remain reliant on Apple Store commissions, which accounted for 51% of the segment’s revenues and 70% of its bottom line in 2018.
What’s more, Hall says there’s a lack of clarity without specific details from Apple about these new ventures. That includes pricing for its video service slated to release this Fall. His $140 price target on Apple shares reflects more than 25% downside.
While Apple is taking on risks with its push to expand services sales, bulls point to its deep pockets and loyal, global client base as competitive advantages. In a note on Tuesday, analysts at Morgan Stanley indicated that Apple could be a force to be reckoned with in the already crowded content space, per Business Insider. “Apple enters the content publishing business with two distinct strengths — a global user base and a massive checkbook. In our view, these two factors alone mean investors and competitors should take it seriously,” wrote Morgan Stanley.