Why this analyst believes advertising is the next big revenue driver for Apple

Published Thu, Aug 4 20225:50 AM EDT

Advertising is the next revenue driver for technology giant Apple and the company is already making strides toward building it, according to Needham's Laura Martin. "We believe advertising could be a meaningful upside driver for AAPL's Services revenues and gross profit, especially based on AMZN's success in growing its advertising business to $37B in 2022E, up from $4B five years ago," wrote Martin in a note to clients Wednesday. "We note that advertising revs typically have 70%-80% profit margins, so AAPL's EPS should grow faster than revs, as its advertising rev grows." According to Martin, recent job postings from Apple indicate the company is already making strides at building this advertising platform, including a senior manager position. Among the slew of reasons why the rapidly expanding advertising industry is a meaningful business for the iPhone maker, Martin cited Apple's ability to accumulate and control data, including where and how its utilized. "AAPL is a Walled Garden with best-in-class user data, at the same time it is lowering the tracking and transparency data available to other companies," which would increase the tech giant's pricing power, she wrote. At the same time, Martin believes this endeavor would benefit apps that have been hard-hit by Apple's IDFA changes implemented last year, which makes it more difficult for companies to track user data typically used for targeted advertising. "We believe ad revs would be recognized in the 'Services' segment of AAPL's P & L, along with AppleTV+, Music, games, etc. Services revs hit $19.6B in 3Q22, and they command a valuation premium, we believe," she wrote. Martin's comments came a week after Apple reported fiscal third-quarter results that beat analyst expectations . Analysts across Wall Street cheered the company's numbers, noting Apple's iPhone sales are creating a " moat " for the tech giant. Shares of Apple are down more than 6% this year and sit roughly 9% off their 52-week high. — CNBC's Michael Bloom contributed reporting