Apple already generates significant high-margin sales from advertising on its devices, but it has opportunities to grow its ad business. That could provide a lift to Apple stock, a Wall Street analyst says.
"We believe Apple advertising on its own apps is underappreciated," Barclays analyst Tim Long said in a note to clients Tuesday. "Most ad revenues are generated on the App Store, with some contribution from News and Stocks. This could expand to other apps like Maps, TV+, Podcasts, etc."
Long estimates that Apple generated $5.3 billion in advertising sales in 2022. He predicted that ad sales will rise 42% in 2023 to $7.5 billion. And he sees Apple's global ad revenue hitting $19 billion by 2026.
While Long is upbeat on Apple's ad sales prospects, he is cautious on Apple stock. He has an equal weight, or neutral, rating on shares with a price target of 145.
Apple Stock Dips On Tuesday
On the stock market today, Apple stock fell 0.4% to close at 157.65.
"Over time, Apple could expand ad revenue through Apple Maps and Apple TV+, which we view as the two low-hanging fruits," Long said. The company is likely to expand its advertising reach to more apps "in the coming months or quarters," he added.
Apple's services business accounted for about 18% of the company's total sales in the December quarter. The largest services segment is its commission-based App Store.
The second-largest services segment is advertising plus traffic acquisition costs, or TAC. The latter is revenue from Alphabet's Google paying to be the default search engine on Apple devices, such as the iPhone.
Long estimates that Apple's TAC revenue was $17.1 billion in 2022.
"We believe Apple's TAC gross margin is 95%, so it is lucrative and high margin," Long said.
AAPL Stock In Consolidation Pattern
Apple stock has been consolidating for the past 65 weeks with a buy point of 183.04, according to IBD MarketSmith charts.
Apple stock has an IBD Composite Rating of 88 out of 99, according to IBD Stock Checkup. The Composite Rating scores a stock's key growth metrics against all other stocks regardless of industry group.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
