He’s started paying a dividend, announced a large stock buyback including spending $14 billion opportunistically at one point over the course of about a week, and announced an upcoming 7 for 1 stock split.
Of course, none of these actions really did anything to the stock until Apple held its last earnings call a couple of weeks ago and announced a bigger stock buyback, the stock split, and better than expected iPhone numbers in the most recent quarter. Apple’s stock is up 12.5% in the last month from the low $500s to nearly $600. It’s hard to know how much of this move was the stock market embracing the new financial engineering techniques and how much was due to the surprising strength of the underlying iPhone business. My guess is that it’s much more of the latter than the former, since the prior financial engineering techniques have done little to move the stock price.
Tim Cook wants to see the stock price rise not simply because he wants his own stock options to be worth more or because it will get Carl Icahn off his back. The main reason he wants to see it rise is because – all things being equal – it makes his employees happy. It helps retain them if the stock keeps moving up and it helps attract new employees.
So, if that’s the goal. Here’s a humble suggestion for Cook on how to increase Apple’s stock price, which doesn’t involve increasing the dividend, doing more stock buybacks, or splitting the stock even more: spin out iTunes into a separate tracking stock.
iTunes is a monster of a business within Apple which always gets ignored compared to how many iPhones and iPads it sold in the past quarter.
However, here are some relevant facts to consider about the iTunes business:
- In the last 12 months, iTunes has done $16.8 billion in revenues.
- This revenue number is steadily growing over time
- A year ago, iTunes revenue was about $14 billion in the last 12 months
- Two years ago, iTunes revenue was just over $10 billion in the prior 12 months.
- iTunes’ revenue in the last 12 months was roughly double the size of Facebook’s, quadruple the size of
- There are now 800 million iTunes accounts; it’s not clear that they are all month active users (or MAUs) but clearly that is a staggeringly high number
Netflix is often held up as a market darling. After hitting a low of around $53/share in mid-2012, Netflix recently touched nearly $450/share earlier this year. Currently, its stock trades at $342 with a market capitalization of just over $20 billion.
Netflix’s business is primarily composed of 44 million subscribers who pay a monthly fee (currently $7.99 a month in the US but going up soon) to stream the video content to their TVs and mobile devices. This led to Netflix having $4.62 billion in annual revenues in the last twelve months.
That’s a nice revenue stream but far less than iTunes’ $16.8 billion in revenue which it made from its 800 million subscribers who pay no monthly fee but only for content they rent or buy from Apple (which could be video, music or apps and gets sent to their TVs or mobile devices).
These businesses are different. One’s a subscription service (Netflix) and one is an on demand service (iTunes, although iTunes seems to be experimenting with subscription models that can rival Pandora like its iTunes Radio service).
If you divide Netflix’s market cap by its user base, you see that Wall Street is saying each sub to Netflix is worth about $467. At $7.99 a month, the market is also saying that each subscriber has a lifetime value to Netflix of 58 months or just under 5 years.
How much is Wall Street valuing iTunes at? It’s hard to say as it’s currently a $16 billion a year business trapped inside the body of an overall business doing $176 billion a year in revenue. This means that iTunes is only 9% of Apple’s overall revenues.
But some of this “iTunes revenue” includes AppleCare and licensing revenue. Let’s strip that out. In the last 6 months, just the iTunes Store revenues were $5.1 billion and this revenue is growing. Let’s assume they finish the next 6 months with a total 12 month trailing revenues from the iTunes Store of $11 billion.
That would suggest the average iTunes user is spending $13.75 a year on stuff from the iTunes Store or about $1.15 a month compared to the $7.99 paid by the average Netflix user.
What would happen if Apple created a separate tracking stock for iTunes? Imagine for a second that John Malone was the CEO of Apple and not Tim Cook. Malone would do something like that in a heartbeat because he knows it would forces investors to place a value on this business that’s double the size of Facebook, instead of ignoring it as an insignificant part of a corporate colossus.
If iTunes was its own tracking stock, what would it be worth?
Is Netflix the best comparison? It seems so, even though iTunes sells a lot more than just videos and has a combination of purchasing, renting and subscribing for content.
Netflix currently trades at a price-to-sales (trailing) multiple of 4.42x. That’s a far cry from the 18x which Facebook gets, the 16x that Yelp gets, or the 28x that Twitter gets, but it’s still better than the 2x which Time Warner gets and the 3x which Apple gets.
Let’s assume that iTunes trades for a similar multiple as Netflix and that just the iTunes App Store revenues – not the AppleCare and licensing revenue – is part of the tracking stock. Assuming the App Store iTunes revenues grows 15% next year (which would be a deceleration from this year), that’s a business with $12.65 billion in annual revenues.
With a 4.42x multiple assigned to it, you’re talking about a business that could be worth $60 billion.
However, in its current format, iTunes is under-monetized compared to Netflix. Netflix makes 7x as much money per month on its subscribers. And yet iTunes has 18x as many subscribers or users as Netflix (800 million versus 44 million).
Will Apple move to a $7.99 monthly subscription plan? It’s unlikely, although they’ve certainly experimented with subscription plans like iTunes Match and possibly with iTunes Radio. I expect them to continue with their pay-as-you-go plan because it’s been so successful for them.
However, I would expect to see a growth of average revenue per iTunes user over time. Horace Dediu has documented how the growth of iTunes users has increased linearly in the past few years, but growth of gross revenues has expanded more exponentially. This is mainly due to the growth in popularity of apps, but video has also grown in popularity (while music has waned).
I would expect video and apps revenue to continue to expand per user. With 800 million users, iTunes has some headroom for growth.
And, of course, there’s always the chance that Apple could seek to more aggressively expand a more competitive offering against Netflix in video streaming or Pandora and Spotify in music.
With such upside for growth from such a large user base, it’s quite possible that public market investors would choose to assign a much higher price-to-sales multiple to iTunes as a tracking stock because it more properly signifies the power of Apple’s relationship with 800 million people. That gets ignored when we only think of Apple the stock and company as a hardware company that has to keep coming up with new products.
We laud Facebook endlessly for having broken through to have a relationship with 1.28 billion people. We talk about the power of that audience. But, so far, the only think you can really do with that audience – which makes money – is put app install ads in front of them. There’s also the potential of marketing your brand to them. But they don’t really buy stuff from Facebook and Facebook doesn’t really know how to sell them stuff. It’s not in their DNA. Nevertheless, the market says Facebook itself is worth $156 billion or $121 per each of its 1.28 billion monthly users.
Apple does sell its 800 million users stuff. They sell new iPhones and iPads. They sell them apps, movies and music. They sell them service contracts and things like iTunes Match. In the future, Apple might get into payments and sell them lots of other stuff. I’d argue that’s an easier migration for Apple to sell their 800 million users other stuff than Facebook to sell its 1.28 billion users stuff or Netflix to sell its 44 million users stuff.
So, if the market decided that Apple’s 800 million iTunes users were worth $121 each just like Facebook’s, the iTunes tracking stock would $97.5 billion – or 20% of Apple’s current market cap. If the power of Facebook’s relationships with its users is $156 billion, Apple’s relationship with its 800 million educated and active users with disposable income to burn seems like it should be worth at least $97 billion.
[No Positions]
