Recent changes to the App Store and surveys of the Apple app market will have only a “minimal financial impact” on the company, investment bank Morgan Stanley said.
Huberty believes that even in the worst-case scenario, the combined App Store changes will only translate to a 1-2% impact on Apple’s earnings per share.
The analyst believes the update to the reader app, which settles an investigation by the Japan Fair Trade Commission, is the most important of the announcements and investigations. However, given that reading apps represent less than 8% of App Store revenue, the financial effects for Apple will be negligible.
“Assuming the worst-case scenario, Apple stops collecting economic data from all the top 20 reading apps, translates to a risk of 4% decline in service revenue, 1% in revenue company total and about 2% of FY22 EPS forecast, “writes Huberty. . “In other words, we believe recent App Store titles attract more attention than the ultimate financial impact on Apple’s revenue or profitability.”
The analyst believes that Apple’s voluntary changes are a way to “proactively balance the power within the App Store”, allowing developers to accumulate more value. Additionally, these measures are a way for Apple to self-regulate in an effort to alleviate legal pressures and antitrust concerns.
Huberty also believes Apple has no plans to make any changes to gaming apps, which are Apple’s “cash cow” and account for around 63% of developer revenue.
Taking a broader look at App Store revenue, Huberty says the App Store is trending lower than expected as pandemic restrictions loosen and consumer behavior normalizes. Morgan Stanley estimates that the App Store’s net revenue is up 12.2% year-on-year through the end of August, 8 points lower than the previous forecast of 20%.
“The deceleration in net revenue growth from + 16% yoy growth in the June quarter comes despite easier AA comparisons over the past 2 months, suggesting that the combination of summery weather warmer and a reopening of economies (plus 2 weeks of the Summer Olympics) encourages consumers to engage less in digital services, ”writes Huberty.
She says Morgan Stanley is adjusting its App Store growth forecast to 12.2% year-on-year in the September quarter and 15.6% year-on-year in 2022, from 20% and 19% respectively.
However, this is more than offset by the ad revenue and the payments Google pays Apple to keep the default search engine on iOS.
As a result, Huberty’s overall service growth forecast for the fourth quarter of 2021 falls to 24% year-on-year, just below the initial forecast of 25% year-on-year. In contrast, its 2022 service forecast rose to 17.2%, from 15.8%.
The analyst maintains his 12-month Apple price target of $ 168, based on a sum of the parts assessment. This breaks down into a multiple of 5.8 enterprise value / sales (EV / sales) on Apple’s product business and a multiple of 11.6x EV / sales on Apple’s service business. This translates into an implied EV / Sales Target multiple of 7x for 2022 and a Target Price / Earnings multiple of 30x.