Apple wants to be known as a services company, says Gene Munster in farewell note

Gene Munster, one of the most well known Apple analysts in the game, sent Piper Jaffray customers a final note on Thursday before departing to start a new venture capital firm, offering investors a final five-year forecast on the Cupertino tech giant.

Part farewell, part business, Munster's note can be considered official confirmation of reports that surfaced last week. The analyst, known for his often bullish take on Apple, will leave Piper Jaffray at the end of December to start AR/VR VC firm Loup Ventures with fellow analyst Doug Clinton and former colleague Andrew Murphy.

"We've written a lot over the years, especially on Apple —this will be our 874th note on the company. This one is farewell," reads the note co-authored by Munster and Clinton.

On to the business portion, Munster says services are key to Apple's future, especially going into the next five years. For over a decade, Apple investors have concentrated on unit growth and innovation as key concerns, and that is likely to continue if the company is unable to pivot to services, he says.

Regarding hardware, Munster sees iPhone 7 beating Wall Street estimates for March and June, while next year's 10th anniversary model should drive high single-digit to low double-digit growth. Apple is widely rumored to incorporate exotic technology like an edge-to-edge OLED screen and glass chassis in at least one version of its next-generation handset.

Referencing the device as "iPhone 10," Munster believes demand for the handset will translate into 170 million sales in fiscal 2018.

Moving beyond near-term product cycles, and citing an emphasis on services seen in recent Apple earnings conference calls, Munster suggests the iPhone maker wants to be known as a services company.

In July, Apple CEO Tim Cook said he expects services, which includes iTunes, iCloud, Apple Music, Apple Pay, Apple Care and the various App Stores, to generate revenues equivalent to that of a Fortune 500 company by 2017. And Apple's services growth appears to be on track to meet that goal. In the September quarter, the segment was up 24 year-over-year, compared to overall company growth of negative 9 percent.

Despite a positive outlook, Munster says it will be an uphill battle to get investors to view Apple as a service business rather than hardware. The backend business would likely need to account for 30 percent or more of Apple's revenue for investors to take the notion seriously, and 50 percent or more for Apple to actually be considered a services brand.

If Apple does indeed want to be seen in a new light, it might have to start selling hardware in a different way, Munster says. For example, the company could accept lower profit margins on cheaper hardware or bundle hardware and software together as value-added packages.

On the topic of innovation, Munster maintains predictions that Apple will focus on augmented reality solutions, likely to see introduction through iPhone. Apple could bring an AR or MR (mixed reality) wearable device to market that ultimately replaces the smartphone in the next five or more years, he says.

Munster also notes Apple's work in the automotive space. Though a consumer product, whether autonomous vehicle software or a full-fledged car, is years away, Apple is likely eyeing auto as the next platform to dominate, he says.

Finally, as a farewell, Munster explained it was iPod that prompted him to become a long-term bull of Apple stock.

"The experience was rough, but using the iPod gave me a sense of joy I never had from any other product," Munster says. "They did it with the iPod and recreated that joy with the iPhone. That magic is a big reason why we've been unwavering bulls on Apple for almost the entire time we've covered it."

While Apple stock is unlikely to replicate the success it enjoyed over the past twelve years in the coming twelve, Munster says, "the company can recreate that magical feeling with some future product and will enjoy watching the stock rise when they do."

Taking over Piper Jaffray's Apple coverage is Mike Olson, who worked alongside Munster from 2004 to 2010.


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