EFTA02659427.pdf

From: Richard Kahn < Sent: Wednesday, May 23, 2018 9:09 PM To: jeffrey E. Subject: Fwd: Apple, Inc.: The Emerging Power of Apple Services, Part 2: The App Store Richard Kahn HBRK Associates Inc. 575 =exington Avenue 4th Floor New York, NY 10022 tel fax cell Begin forwarded message: From: =/b>"Morgan Stanley" < Subject: =/b>Apple, Inc.: The =merging Power of Apple Services, Part 2: The App Store Date: =/b>May 23, 2018 at 5:08:06 PM =DT To: qb>< > Reply-To: =,b>< > <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/> Wealth =anagement <http://www.morganstanley.com/img/cs/spacer.gif> Apple, Inc.: The =merging Power of Apple Services, Part 2: The App =tore <http://www.morganstanley.com/imecs/spacer.gif> EFTA_R1_01906427 EFTA02659427 Katy L. Huberty, CFA =E2 Morgan Stanley May 23, =018 9:00 PM GMT In this follow-up to our =arch Services report, we counter the bears, arguing that App Store =rowth is sustainable and take rates are defensible. As a result, we =elieve Services margins have room to expand and the market is =ndervaluing the Services business. Raising SOTP PT to $214 (from =200). Services is fast becoming Apple's primary growth =river. Apple revenue grew at an 8% CAGR over the last five years, =riven in large part by sales of its flagship iPhone. But as device =eplacement cycles extend and device installed base growth slows to =ingle digits, we believe Services will pick up the growth baton and =ccount for - 67% of Apple revenue growth over the next five years. We =lready see the early stages of this transition, with normalized =ervices revenue growth accelerating from 18% Y/Y to 31% Y/Y in the last =ive quarters (1), while iPhone unit growth averaged just 1% Y/Y growth =ver the same period. We acknowledge that iPhone data points remain =elevant to the Apple thesis, but we believe investors instead ought to =ocus on understanding the drivers and growth trajectory of the Services =usiness. We are using this follow-up to our March 2018 Apple Services =eep dive to explore the largest business within Services, the App =tore, which we estimate already accounts for nearly 40% of total =ervices revenue and is the greatest contributor to Services revenue =rowth.Why focus first on the App Store? Two reasons. First, the App =tore is the largest and most significant contributor to Services =rowth. We estimate the correlation between Apple Services revenue and =pp Store net revenue (i.e. what is recognized on Apple's P&L) is =.98, with an r-squared of 0.96 (2), implying Services revenue is =irectly linked to the performance of the App Store. Second, Apple is =otoriously reticent when it comes to Services data points, and the App =tore is one of the only Services segments where there is detailed third =arty data available to analyze. As a result, we have a bette This alert is sent from: Andrew Atlas, You received this because you requested =hat you receive content and reports from: APPLE =NC. Please contact your FA if you want to unsubscribe from the =lerts. <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> Disclosures: Please see =he full report for risks, disclosures and other important =nformation. Important disclosures regarding the =elationship between the companies that are referenced in Morgan Stanley =esearch and Morgan Stanley Wealth Management research are available on =he Morgan Stanley Wealth Management disclosure website at https://www.morganstanley.com/online/researchdisclosures. 2 EFTA_R1_01906428 EFTA02659428 Morgan Stanley Wealth Management Not Acting as Municipal =dvisor Morgan Stanley Wealth Management is not acting as a municipal =dvisor to any municipal entity or obligated person within the meaning =f Section 158 of the Securities Exchange Act (the "Municipal Advisor =ule") and the opinions or views contained herein are not intended to =e, and do not constitute, advice within the meaning of the Municipal =dvisor Rule. Copyright The =opyright in materials provided by Morgan Stanley is owned by Morgan =tanley & Co. LLC. Morgan Stanley Wealth Management is the trade =ame of Morgan Stanley Smith Barney LLC, a registered broker-dealer in =he United States. © 2018 Morgan Stanley Smith Barney LLC. Member =lPC. <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> 3 EFTA_R1_01906429 EFTA02659429