Apple needs to switch to subscription unit like Netflix

Apple’s stock could “re-charge” and tear higher if the company makes a fundamental change to its business and shifts to a monthly subscription style, according to a top Apple analyst, Toni Sacconaghi of Bernstein.

The iPhone maker has historically traded at a comparatively low earnings multiple relatative to the marketplace as investors see it as a hardware manufacturer.

“We assume that for Apple to trade at a materially larger multiple, it needs to migrate its transactional advertising model to a subscription based model,” wrote Sacconaghi on Tuesday. “As consumers become increasingly familiar with paying monthly subscriptions, especially for essential ‘tech utilities’ (e.g. Netflix, Spotify, Microsoft Office 365), we’re able to imagine Apple applying a subscription plan of its.”

Sacconaghi’s $195 price aim for represents 15 percent upside from Tuesday’s close; shares fell a lot more than 1 percent in early Tuesday trading.

While Apple shares are up 46 percent this year through Tuesday’s close, iPhone was Apple’s weakest developing business within the last quarter, contributing just 1.5 percent to the company’s overall growth. All the businesses grew double digits, according to the analyst, an indicator Apple may choose to explore other development avenues going forward.

Sales of new products outside of Apple’s core components franchise could contribute 260 to 490 basis details of total company income growth each year, according to Bernstein analysis. (A basis point equals 0.01 percent.)

“Consumers could lease iPhones, iPads, Macs, and solutions such as iCloud and Apple Music for one “low” monthly cost, and have their hardware upgraded after a particular number of years,” suggested Sacconaghi. “By shifting to a subscription style, Apple would be able to lock in recurring income streams and freeze the length of replacement cycles, very likely leading to a material re-ranking of its stock’s multiple.”

To be certain, the analyst also see tax reform mainly because a positive for Apple’s business and a method to raise its multiple. Should Republicans cut the corporate tax charge to 20 percent as planned, the company could see an 18 percent raise in reported revenue per share pitched against a 6 percent raise for technology overall.

“The upshot is that under the new taxes reform costs, Apple would like a lower 20 percent U.S. tax charge on its domestic revenue, and also would no more accrue any U.S. taxes on its offshore revenue,” concluded Sacconaghi. “In effect, this would imply that Apple’s general global tax charge could decrease from 25.5 percent to 11.9 percent, resulting in an 18 percent boost to reported EPS.”

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