Apple Music Could Push Apple Inc. Stock to the Trillion-Dollar Club

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Apple Music - Apple Music Could Push Apple Inc. Stock to the Trillion-Dollar Club

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Apple Inc. (NASDAQ:AAPL) is the world’s biggest publicly traded company with a market cap closing in on a trillion dollars. But with iPhone unit sales starting to flatten out, a lot of bears are starting to question what exactly will be the catalyst that pushes Apple stock up to and above that trillion-dollar mark.

Here’s an unusual answer for the doubters: Apple Music.

Apple Music has been absolutely on fire lately, adding roughly 10 million users over the past month alone. These users are paying $10 per month. Therefore, each new million subscribers it acquires translates into incremental revenues of $120 million for Apple.

That is just drop in the bucket when it comes Apple (projected revenues of $260 billion this year).

But Apple Music fits into the broader umbrella of Apple growing its high-margin, steady software business. This software business will be the catalyst for Apple stock to break into the trillion-dollar club. As such, the growth of Apple Music will be a big reason why Apple stock becomes the first trillion-dollar company.

Here’s a deeper look.

Apple’s Big Software Pivot

Apple became the world’s biggest company by selling the world a bunch of iPhones, iPads and Mac computers.

Now, that hardware business is drying up. Everyone who wants a computer already has one. Same with an iPad. And same with a smartphone. Thus, there aren’t really any new buyers in Apple’s core hardware markets.

Bears think this is a problem. After all, more than two-thirds of Apple’s revenue comes from its celebrated iPhone.

But, quite frankly, it isn’t a problem. At all.

Apple is making a big shift from a technology hardware company to a technology hardware and software company. Through various subscription services like iCloud, Apple Music, Apple Pay and the App Store, Apple is starting to monetize its massive iOS ecosystem.

These software revenues are higher margin than the hardware revenues. They are also more predictable because most of the money comes from subscription services, so it’s annually recurring and not at all lumpy.

In the big picture, then, Apple is pivoting from a lumpy, lower-margin hardware business to a steady, higher-margin hardware and software business. This transition will ultimately power Apple stock higher over the next several years.

At the heart of this transition is Apple Music. The on-demand, subscription music service has absolutely exploded in popularity over the past several years and now has a clear trajectory to becoming the dominant streaming music platform in the world.

Because Apple Music’s growth fits within Apple’s big pivot to software, it is a critical growth component of Apple stock going forward. Thus, so long as Apple Music continues to do well, that is a strong bullish read into Apple stock’s future growth potential.

Apple Music Is Red-Hot

There is no denying the fact that Apple Music is red-hot right now.

Late last year, analysts noticed that its subscriber growth was actually accelerating and that the platform was starting to act and look a lot like a legitimate rival to streaming music king Spotify Technology SA (NYSE:SPOT).

Then, a few months back, The Wall Street Journal reported that Apple Music was growing twice as fast as Spotify and that it was on track to overtake Spotify as the biggest player in the U.S. streaming music market.

Most recently, Apple CEO Tim Cook just reported that Apple Music now has 50 million users. That is up 10 million from just a month ago.

That is absurd growth of essentially 25% month to month. It doesn’t get much hotter than that.

Moreover, Apple Music projects to be a big-growth platform over the next several years. It seems like ever since Apple decided to double down on Services and really gain traction with Apple Music, the company has found great success in building Apple Music’s user base.

That makes sense. After all, there are 700 million-plus iPhones in the world. For those 700 million-plus iPhone users, there is essentially zero friction between owning an iPhone and subscribing to Apple Music. It is already built into the ecosystem.

Spotify, on the other hand, requires additional effort of downloading the app, entering additional payment details, creating an account, and so on.

Thus, this zero-friction jump from owning an iPhone to subscribing to Apple Music should allow Apple Music to stay red-hot into the foreseeable future.

Bottom Line on AAPL Stock

Do you buy AAPL stock because of Apple Music? Not exclusively. But Apple Music is part of Apple’s broader pivot into software, and software revenues are the core of this company’s growth narrative over the next three to five years.

As of this writing, Luke Lango was long AAPL.


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/apple-music-could-push-apple-stock-to-the-trillion-dollar-club/.

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