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Aug. 28, 2021, 2:57 p.m. EDT

This could be Apple’s next $20 billion business

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By Emily Bary

Apple Inc. could turn advertising into its next $20 billion business as the company ramps up its offerings and clamps down on ad targeting by third parties.

That’s according to estimates from Evercore ISI analyst Amit Daryanani, who pegged Apple’s /zigman2/quotes/202934861/composite AAPL -0.03% advertising business as an “underappreciated” part of the company’s story and one with the potential for big growth over the coming years. The advertising business could reach $20 billion in revenue by 2025, he posits, up from perhaps $2 billion currently.

Advertising represents a high-margin revenue stream for Apple. By 2025, ad revenue could constitute about 17% of Apple’s services revenue and about 5% of total revenue, but 9% of earnings per share, by Daryanani’s math.

See also: Apple to make video upgrades key focus of next iPhone launch, says report .

Daryanani rates Apple’s stock outperform, with a $180 price target. The stock slipped 0.8% in midday trading Wednesday. It has rallied 16.9% over the past three months, while the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.18% has gained 3.4%.

The smartphone giant’s current advertising revenue mainly comes from App Store search, according to Daryanani, and he sees opportunities for the company to turn the App Store into more of a “content discovery” vehicle versus a “content delivery” one. He pointed to the company’s launch of search ads in China earlier this year and the potential for increasing ad loads as ways that Apple can increase its advertising revenue organically.

There are also new opportunities that Apple could tap, modeled off of successful endeavors by other companies in the digital ad world. Roku Inc. /zigman2/quotes/205087179/composite ROKU +0.41% offers a “reasonable precedent” for the ways that Apple could monetize its Apple TV installed base, and Alphabet Inc.’s /zigman2/quotes/205453964/composite GOOG +0.11% /zigman2/quotes/202490156/composite GOOGL -0.09% Google “is likely generating few billion dollars” from Google Maps advertisements, Daryanani wrote. Apple could try similar tactics with Apple Maps.

On the whole, Google looks poised to generate more than $200 billion in advertising revenue this year, he continued, and while Apple is unlikely to “compete with Google’s scale anytime soon,” the size of Google’s ad business gives him more confidence in his $20 billion estimate for Apple come 2025. He also noted that Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN -0.46% grew advertising revenue to about $21 billion in 2020 from roughly $3 billion in 2016, suggesting Apple could achieve a “similar trajectory.”

As Apple grows its own ad business, the company has taken steps to shake up the broader digital ad space, most notably through its App Tracking Transparency efforts. This makes it so third parties need to obtain consumer permission before tracking their broader online activities . Many users appear to be opting out of having their activity monitored in this way, according to early estimates.

Don’t miss: Apple’s hot antitrust autumn—storm clouds are forming from multiple directions

Apple positions App Tracking Transparency as a privacy-focused effort, and while Daryanani acknowledges that it “certainly does help in that arena,” he also said that there could be a more “Machiavellian” or “nuanced” way to view these efforts: By making it more difficult for third-party apps to target users on iOS devices, those companies may be tempted to spend more money on Apple’s own advertising products.

He pointed to recent comments from Zynga Inc. /zigman2/quotes/209662259/composite ZNGA +1.08% , which has been negatively impacted by the privacy changes. “We’re now testing and actually spending money with Apple to acquire users because…one of the things they’re doing under the hood is they’re building their own ad tech capabilities,” Zynga Chief Financial Officer James Griffin said at a KeyBanc conference earlier this month.

/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 148.64
-0.05 -0.03%
Volume: 50.72M
Oct. 25, 2021 4:00p
P/E Ratio
29.11
Dividend Yield
0.59%
Market Cap
$2457.87 billion
Rev. per Employee
$1.86M
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
35,741.15
+64.13 +0.18%
Volume: 270.41M
Oct. 25, 2021 5:26p
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/zigman2/quotes/205087179/composite
US : U.S.: Nasdaq
$ 323.19
+1.31 +0.41%
Volume: 2.70M
Oct. 25, 2021 4:00p
P/E Ratio
197.02
Dividend Yield
N/A
Market Cap
$42.96 billion
Rev. per Employee
$923,838
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/zigman2/quotes/205453964/composite
US : U.S.: Nasdaq
$ 2,775.46
+2.96 +0.11%
Volume: 1.05M
Oct. 25, 2021 4:00p
P/E Ratio
30.09
Dividend Yield
N/A
Market Cap
$1841.24 billion
Rev. per Employee
$1.35M
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/zigman2/quotes/202490156/composite
US : U.S.: Nasdaq
$ 2,748.94
-2.39 -0.09%
Volume: 1.72M
Oct. 25, 2021 4:00p
P/E Ratio
29.80
Dividend Yield
N/A
Market Cap
$1841.24 billion
Rev. per Employee
$1.35M
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/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 3,320.37
-15.18 -0.46%
Volume: 2.23M
Oct. 25, 2021 4:00p
P/E Ratio
57.87
Dividend Yield
N/A
Market Cap
$1689.26 billion
Rev. per Employee
$297,430
loading...
/zigman2/quotes/209662259/composite
US : U.S.: Nasdaq
$ 7.46
+0.08 +1.08%
Volume: 24.04M
Oct. 25, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$8.06 billion
Rev. per Employee
$879,644
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