Apple Inc. (NASDAQ:AAPL) should consider radically changing its transaction-centric business model and switch to a modern subscription-based business instead, if the company wants to trade at a higher multiple.
That’s according to Bernstein analyst Toni Sacconaghi, who wrote in a note to clients today that “As consumers become increasingly accustomed to paying monthly subscriptions, especially for key ‘tech utilities’ (e.g. Netflix, Spotify, Microsoft Office 365), we could imagine Apple implementing a subscription plan of its own.”
CNBC has more details on the interesting idea:
“Customers could lease iPhones, iPads, Macs, and services such as iCloud and Apple Music for one ‘low’ monthly fee, and have their hardware upgraded after a certain number of years,” suggested Sacconaghi. “By moving to a subscription model, Apple would be able to lock in recurring revenue streams and freeze the length of replacement cycles, likely leading to a material re-rating of its stock’s multiple.”
To be sure, the analyst also sees tax reform as a positive for Apple’s business and a way to raise its multiple. Should Republicans cut the corporate tax rate to 20 percent as planned, the company could see an 18 percent boost in reported earnings per share versus a 6 percent lift for technology overall.
While Apple is highly unlikely to make such a move anytime soon, it’s not so crazy to think it may eventually happen. Monthly subscription services are all the rage these days, with software companies almost totally abandoning the old one-time upfront payment model. Is it such a stretch to think the worlds most successful hardware maker could do the same?
Apple Inc. shares were trading at $169.40 per share on Wednesday afternoon, down $0.24 (-0.14%). Year-to-date, AAPL has gained 48.61%, versus a 19.61% rise in the benchmark S&P 500 index during the same period.