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Apple wants to be 'sexy' and predictable at the same time

2023-02-07T20:14:20.735Z


The manufacturer of the 'iphone' wants the market to value its service business very highly Companies like General Electric or Goldman Sachs know that one of the keys to obtaining a higher valuation on the stock market is having recurring and stable income. The same can be said of Apple. The iPhone maker , with a valuation of 2.4 trillion dollars, has turned from the offer of devices to the provision of services, which accounted for 18% of its revenues in the last quarter, and that has b


Companies like General Electric or Goldman Sachs know that one of the keys to obtaining a higher valuation on the stock market is having recurring and stable income.

The same can be said of Apple.

The iPhone

maker

, with a valuation of 2.4 trillion dollars, has turned from the offer of devices to the provision of services, which accounted for 18% of its revenues in the last quarter, and that has boosted its capitalization.

But not everything it offers has the same value.

By focusing on providing more services, Apple has become more palatable.

In 2018, its enterprise value was the equivalent of three times the estimated revenue for the following year.

Today, with a value of 2.5 trillion dollars including net indebtedness, the company headed by Tim Cook is valued at six times its sales.

One way to understand this is to separate the different components of Apple's valuation.

Analysts assume that it will enter around 300,000 million dollars from the sale of

iPhones

and other objects this year.

The devices have changed, but the business remains more or less the same, so we can calculate that that part of the business is worth about five times the sales, which is still well above Apple's historical average.

If we subtract this from the enterprise value, we see that investors are valuing the services business at around a trillion dollars, about 10 times the expected revenue.

This is more than Microsoft, which is trading at eight times its revenues and posting similar growth, as well as surprisingly steady.

Whether this is justified will depend on the services that Apple offers and how stable and subscribable those services are.

For example, video games and advertising can become huge revenue businesses, but at the same time they are more sensitive to a weak economy than music subscriptions or cloud backups.

Apple does not break down how much of its revenue comes from each of the areas, but it is something that is important.

Cyclical services are often priced less generously, even when they are growing at a good pace.

Alphabet, Google's ad-reliant parent, and video game company Electronic Arts are valued at four times their estimated sales.

As an example, if 20% of Apple's services are cyclical in nature and investors apply the same multiple of sales as the listed companies, the reasonable price of the shares would fall by 5%.

It may sound like we're being overly picky, but we're not, because services are accounting for a growing part of Apple's business: nearly a fifth of revenue today, up from less than 10% in 2015. It's possible that be reluctant to disclose more information, as regulators such as EU antitrust commissioner Margrethe Vestager will seek to introduce more competition into digital markets.

Now, if there is one thing that investors value as much as the fact that a company is predictable, it is that it is also transparent.

FOR MORE INFORMATION: BREAKINGVIEWS.REUTERS.COM.

The authors are columnists for Reuters Breakingviews.

Opinions are yours.

The translation is the responsibility of EL PAÍS

Source: elparis

All business articles on 2023-02-07

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