+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

How Apple's business is more like 'Harry Potter' than Pixar

Apr 6, 2016, 23:12 IST

Warner Bros.

Research firm Needham presented a new way to evaluate Apple's business in a note on Wednesday that suggests Apple could be worth as much as $170 per share.

Advertisement

The key, Needham analyst Laura Martin writes, is that while Apple only really makes money when one of its customers buys a new device, those devices are "sequels" to older devices, which means there's actually a much lower risk of that sale not recurring, given Apple's large built-in fanbase.

It's as if investors are pricing Apple stock like it's reinventing the iPhone every year. But it's not. Here's the metaphor Martin uses: It's like Apple is more like the Harry Potter movie franchise than Pixar, the Disney-owned studio.

Apple's gadget business is a hits-driven business, and Apple's share price falls when its next product seems like it's not going to be as big a hit as its last. The movie business has the same problem.

Between 2001 and 2011, Pixar produced nine movies, of which seven were completely new franchises, like "Wall-E," which didn't have built-in fanbases. Sure, most of those movies ended up being smash hits, but there was a considerable amount of risk if one of those movies didn't pan out.

Advertisement

Compare that to the "Harry Potter" franchise, which released eight movies during the same timeframe, all with the same main stars and same overall story. Warner Brothers, the corporate producer of the film, incurred much less risk and could end up investing more in later movies because it could be sure that Harry Potter fans would show up for the next installment.

The iPhone is more like Harry Potter: its revenues are consistent, and Apple can count on its customers to stay loyal to their preferred smartphone. Also like the series of movies about Hogwarts, Apple's sales have significant upside when it does release a hit product, like the iPhone 6 that took advantage of pent-up demand for bigger-screened phones.

And when Apple isn't releasing major hit products, its sales remain remarkably stable. Even though iPad sales have been falling recently, they haven't gone off the cliff. In the past four years, iPad sales have stayed within 15% of its average of 65 million tablets shipped.

Apple is the most valuable company in the world, but Wall Street seems to be having a difficult time nailing down its true value, considering that it's a computer hardware company, an internet company, and a media company rolled into one. Earlier this week, Credit Suisse released a major presentation suggesting that Apple was undervalued as an internet company.

Now Needham believes it should be priced like a movie studio. Currently, Apple is trading at $110 per share. Needham moved its price target to $150.

Advertisement

NOW WATCH: Stop making the biggest mistake when it comes to texting etiquette

Please enable Javascript to watch this video
You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article