Goldman Sachs: Search revenue is gaining on the App Store

Fast as App Store revenue is growing, says analyst Rod Hall, the money Google pays Apple to be its search engine of choice is growing even faster.

From a deep dive into Apple Services that landed on my desktop Sunday night:

Based on the output from our TAC [total acquisition costs] model, we conclude that TAC revenue for AAPL is likely to be ~$9bn in 2018, which we believe from our conversations with investors is materially above where consensus is (~$5bn-$6bn). We also believe TAC growth should continue to be robust given ever increasing search intensity even as the rate stabilizes after recent increases associated with Siri…

We estimate n ~31% of Services revenue in 2018 will be generated from App store sales, 24% from Search TAC, 17% from AppleCare/repair services, 8% from iCloud, 8% from Apple Music and the rest 12% from other services. We expect the contributions from Apple Music and Search TAC to Services to grow through 2020, while App Store’s contributions could remain stable.

Maintains Neutral rating and $240 price target.

Note: Although “total acquisition costs” contains the word “cost,” the cost is (mostly) Google’s. To Apple, TAC is revenue.

Below: Hall’s App Store and TAC spreadsheets (click to enlarge).

My take: Apple’s services revenue stream is full of surprises.