Bernstein analyst sees billions in Apple's ad business

“We do not believe that Apple has been oblivious to this opportunity.” —Toni Sacconaghi

From a note to clients that landed on my desktop Monday:

Due to Apple’s strongly-avowed stance on user privacy, investors have generally paid little attention in recent years to the company’s nascent advertising efforts. Nonetheless, the potential for advertising is clearly extent. After all, Apple today has access to an installed base of over 800 million iPhones (and 1.3 billion Apple devices in total), of which nearly all comprise daily active users – the gold standard for user engagement. And we do not believe that Apple has been oblivious to this opportunity.

Indeed, after shutting down its largely unsuccessful iAd advertising platform in June 2016, Apple redoubled its efforts by launching “Search Ads” for the App Store just four months later. Today, we believe that these efforts are finally approaching an inflection point, with Search Ads now on track to achieve a revenue run rate of $1+ billion within the next year. Moreover, multiple other Apple properties remain under-monetized, including Apple Maps, News, and potentially a streaming video service.

Here, we would draw a potential comparison to the advertising business of Amazon, another FAANG stock that has historically struggled to compete within digital advertising. Within just the last 2 years, Amazon’s $4-5B ad business has arguably become the third most significant driver for the stock, following the core ecommerce business and Amazon Web Services – a remarkable transformation, considering that this ad business was effectively invisible to investors until last year. Along similar lines (albeit to a lesser scale), we suspect that success in Apple’s ad business could ultimately reinforce the investor narrative of Apple’s high-margin Services growth, which remains one of the key bull theses for the stock.

Below: Sacconaghi’s search ad spreadsheet:

Click to enlarge.

Maintains Market Perform rating and (deeply underwater) $200 price target. 

My take: The business press took this as a bullish signal (here and here), despite the bearish price target.