My investment thesis has Apple (AAPL) rallying into the 5G iPhone launch event in October. The stock didn’t rally on the event last week as new iPads, Macs and the Apple One bundle apparently didn’t excite the market. Regardless, the further move into subscription services is a positive for the company, but the stock is likely to rally for another reason.
Apple One As A Service
As Apple began making a shift to subscription services years ago, the goal was to find ways to reduce dependency on selling new products to customers every couple of years. The company always had some basic services such as iCloud. The move into more entertainment services started a few years ago with Apple Music and now the tech giant has moved full speed ahead into more and more services with the planned launched of Fitness+ in late 2020.
Apple describes the new bundling service called Apple One as follows:
Apple One is an all‑in‑one subscription that bundles up to six Apple services. It’s the easiest way to get your favorite Apple services at one incredible price — and get even more enjoyment out of your Apple devices. Apple One includes the best services to keep you entertained and informed, as well as iCloud storage for your photos, files, and more. Services include Apple Music, Apple TV+, Apple Arcade, iCloud, Apple News+, and, coming in late 2020, Apple Fitness+.
As somebody that worked in the telecom sector in the 2000s, bundling has always been the holy grail of selling consumer services. Companies always think combining wireless service with broadband or any various service options will deliver a lock on consumers wanting to avoid multiple bills.
The problem with most bundles is that consumers want best of breed products. A service provider must provide a quality of service warranting any interest in the bundle. In addition, most bundles just lead to discounting existing products.
The major positive for Apple is that the tech giant constantly innovates and expands. The company has already gone from only iCloud and Apple Music to a new list of 6 subscription services.
The company would probably do some good by expanding subscription service options to content outside of the Apple platforms. The positive is that the company continues to expand options.
One of the major complaints is the lack of freedom in bundling these services. Apple will probably eventually offer the ability to combine multiple services and save a few dollars. A consumer happy with Spotify (SPOT) might only want to bundle iCloud, Apple TV+ and Apple Fitness+. As one can see, the current bundles don’t offer much value with all the savings tied to the Apple Music service not wanted.
The big question is the amount of money such subscriptions could generate for Apple. The tech giant needs to generate ~$3 billion in annual revenues from Apple One to boost total revenues by 1%. The company would need to add 11.25 million Family subs at the $240 annual subscription rate in order to generate such growth.
Ultimately, some of the negatives of the bundling discounts impacts the benefits. The Premier service costs an incredible $55 separately providing a 45% discount on the bundle saving customers $25 a month as follows:
- Apple Music – $9.99 (Apple Music Family plan costs $14.99)
- Apple TV+ $4.99
- Apple Arcade – $4.99
- Apple News+ – $9.99
- iCloud storage 2 TB – $9.99
- Fitness+ $9.99
Note a customer with Apple Music and TV+ would only add $15 in additional monthly revenues by subscribing to the Premier bundle. Potentially, Apple would sell a ton of additional services to existing customers with limited additional revenues due to the large discounts.
Still Over Extended
The market sees the recent tech wreck as a buying opportunity in the mega cap tech sector. Apple is down over $30 from the recent highs and Microsoft (MSFT) has fallen over $34. The number on Apple sounds even worse considering this fall amounts to $120 prior to the 4-for-1 split.
The reality is that these tech stocks got far too expensive in the work-from-home rally. Apple alone traded at 36x forward EPS estimates at the peak. Even after this collapse in the sector, Apple, Microsoft, Alphabet (GOOG, GOOGL) and Facebook (FB) all still trade on average at 26x forward EPS estimates.
The argument remains that multiple contraction will occur over time. Apple is due for a major rally into the 5G iPhone event. In addition, charts like these suggest hedge funds are aggressively shorting the tech sector in a sign of a snapback rally on the horizon.
The key investor takeaway is that Apple and the other tech giants are due for a snapback rally. The 5G iPhone event in October should drive excitement for the stock in one last rally before more multiple contraction.
The Apple One bundle is a potential catalyst over time, but the large discounts severely reduce the revenue upside in the near term. The stock is due for a rally here, but this is the only reason to own Apple at nearly 28x forward earnings estimates.
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Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.