A week from today, Apple (NASDAQ:AAPL) will launch Apple TV+, the company's big push into video streaming and original content. There are plenty of valid reasons to be skeptical about the service's prospects, as this is entirely new territory for the Mac maker, and it is entering a highly competitive market. In what can be seen as an acknowledgement of that relative weakness compared to household entertainment names like Netflix or Disney, the tech company is giving away a free year of Apple TV+ for customers who purchase hardware.
But Apple is playing the long game, here, and Apple TV+ could be a booming business within a few years.
A new Street-high price target
Morgan Stanley analyst Katy Huberty put out a research note this week (via CNBC and Barron's) estimating that Apple TV+ can garner approximately 136 million paid subscribers by 2025 to become a $9 billion business for Apple. That assumes that 10% of Apple users sign up and keep their subscriptions by that year. Apple TV+ could be accretive to earnings as soon as fiscal 2021, Huberty estimates.
Huberty also downplays concerns raised by other Wall Street analysts regarding how Apple will account for the promotion. Goldman Sachs suggested last month that Apple would treat the deal as a bundle that could adversely impact how the company recognizes hardware revenue.
"For Apple TV+ to have a more material impact to our near term estimates, we'd have to assume 1) Apple TV+ production costs are significantly higher at the launch of the Service, and/or 2) more users redeem the Apple 12 month free offer with the purchase of a device," Huberty wrote in a note to investors. Morgan Stanley estimates that Apple will defer $57 in revenue per iPhone that will be recognized over a year. Additionally, Huberty thinks Apple is capitalizing all of its content costs and will proceed to amortize those expenses of the course of three years.
In general, capitalizing costs (on the balance sheet) and subsequently depreciating and amortizing them instead of expensing them up front (on the income statement) allows companies to spread out costs over time, which can be appropriate when a company is investing to create a long-lived asset. For reference, Netflix also capitalizes its content production costs.
Huberty reiterated her overweight rating on Apple stock while increasing her price target to $289, which represents a new Street high after Raymond James assigned a $280 price target on shares a few days ago. The analyst concluded, "With a growing list of catalysts, including accelerating Services growth and multiple expansion ahead of the 5G iPhone launch, and an attractive 8% total dividend + buyback yield, we continue to view Apple as our top pick into 2020."