I continue to assign a Buy investment rating to Apple (NASDAQ:AAPL) Share.
I wrote about the AAPL September product launch event with my previous article published on September 13, 2022. In this latest article from the company, I focus on the growth of Apple paid subscriptions that have exceeded 900 million. I believe the market will be willing to assign a higher valuation multiple to AAPL, given my forecast and expectations of a higher Services revenue contribution driven by subscription growth.
How many subscribers does Apple have in 2022?
Apple revealed in the company’s Q4 FY 2022 (YE Sep 30) earnings call that its paid subscriptions increased approximately +5% quarter-on-quarter from more than 860 million in the third quarter to more than 900 million in the most recent quarter.
The paid subscription numbers for AAPL are even more impressive, if you look at the growth over a longer period of time. Specifically, Apple’s paid subscriptions have increased more than 100% in the last three years, with the company’s most recent paid subscriptions representing a +21% year-over-year increase in the last year.
AAPL Stock Key Metrics
There are other key Apple-related metrics that investors should watch, in addition to the number of paid subscriptions.
AAPL disclosed in the company’s fiscal year 2022 10-K filing which generated 38% and 62% of its most recent annual turnover from “direct and indirect distribution channels”, respectively. In its 10-K filing for fiscal year 2022, Apple defines the direct channel as “its online and retail stores and direct sales force,” while referring to “third-party cellular network operators, wholesalers, retailers, and resellers” (primarily in relation to product sales) as the indirect channel.
Of note, the proportion of Apple’s revenue derived from the direct distribution channel was relatively lower at 36% and 34% for fiscal 2021 and fiscal 2020, respectively. In my opinion, the increase in revenue contribution from Apple’s direct distribution channel serves as another indicator showing that AAPL’s Services business is expanding.
Another key metric worth mentioning is the increase in prices for some of Apple’s key subscription offerings. On October 24, 2022 looking for alpha news Article He noted that AAPL “is raising the prices of its media subscription services” such as Apple Music, Apple TV+ and Apple One “for the first time in the United States.”
The expansion of the Apple Services business and subscription services is not just about volume growth (increase in paid subscriptions), as price is also another key driver of growth. Morgan Stanley (MS) published a research report (not publicly available) titled “Stay OW After Strong September Quarter” on October 28, 2022 which estimated that AAPL’s recent price increases for select subscription offerings “could add up to 3 points to service growth assuming zero churn”. “
Apple also revealed some important metrics in its most recent quarterly investor report, noting that the company saw “double-digit growth in iPhone Switches” and “another record in our installed base of active devices” in the fourth quarter of the year. fiscal year 2022. More consumers switching from Android phones to iPhones and further expansion of AAPL’s installed base are definitely tailwinds for the company’s future paid subscriptions and Services revenue growth.
Is this positive for your trading outlook?
Growth in paid subscriptions, rising direct channel revenue, price increases for subscription offerings, and a larger installed base are all positive signs for Apple’s future business outlook.
In my September update for Apple, I emphasized that “a more favorable mix with a bias toward higher-priced or higher-margin products and services” is a key part of the investment thesis for AAPL.
The Services business accounted for 19.8% of Apple’s total sales for fiscal 2022, and my forecast is that the Services revenue contribution may grow to 25% or even higher in the next five years.
Where are Apple shares headed?
In the short term, the rise in Apple’s share price could be limited by headwinds related to the production stoppage. In the past month, AAPL’s share price has risen +0.5% compared to a 5.5% increase for the S&P 500. On November 7, 2022, the company issued a 8-K filing revealing that “COVID-19 restrictions have temporarily affected the iPhone 14 Pro and iPhone 14 Pro Max main assembly plant located in Zhengzhou, China.” This has led Wall Street analysts to reduce its financial projections for fiscal year 2023 for AAPL.
In the long run, a growing share of revenue generated by the Services business and subscription services is the key catalyst that should allow Apple shares to eventually rise higher. Recurring subscription services are seen as generating higher quality revenue for AAPL compared to single product sales, while a higher proportion of higher-margin subscription services will drive Apple’s overall profitability. This should put Apple in a good position to earn a higher long-term valuation multiple.
Is AAPL Stock Buy, Sell, or Hold?
AAPL stock is a buy based on my analysis. The steady rise in Apple’s paid subscriptions is encouraging, and I’m of the view that a larger paid subscription base and higher service revenues will boost AAPL’s stock.