Apple's Live TV Service May Keep Customers Tuning In

Our bullish investment thesis for

Media content negotiations have likely held up an Apple Live TV service in recent years as we suspect content owners have preferred to move slowly to date, favoring owned firms (like Hulu) and traditional TV distributors (

We will maintain our $133 fair value estimate for Apple for now, even though the company was hit with a EUR 13 billion ($14.5 billion) tax bill by the European Commission, which ruled that Ireland gave illegal tax benefits to Apple. We concede that $3 per share, or just over 2% of our fair value estimate, is at risk with the ruling, but the timing and amount of the final payment remain uncertain. Apple will not take a financial charge for the tax bill in its near-term results, and the fine may be placed in restricted cash but will not be immediately paid out. We expect both Apple and Ireland will appeal the ruling, and a final decision could take years. Apple has almost $215 billion in international cash on hand, so the record tax bill will make only a small dent in the firm's cash cushion. Further, Apple indicated that the ruling will not have an effect on its long-term tax rate, presumably because its Irish tax structure in question was modified in 2015. Regardless, we continue to view Apple as fundamentally undervalued, and the company remains one of our best investment ideas in the tech sector.

In essence, the European Commission considered Apple's tax structure within Ireland, which was in compliance with Irish and international laws, as anticompetitive, as Apple received tax breaks (presumably in exchange for creating jobs in the region) that allowed the company to pay a tax rate as low as 1% in 2003 and 0.005% by 2014 on all revenue from the European Union, not just sales within Ireland. We estimate that Apple earned roughly $71 billion in cumulative operating income in Europe over the time frame in question (2003-14).

We foresee a bounceback in revenue with 4% growth in fiscal 2017 along with the launch of the iPhone 7. Longer term, we foresee Apple returning to growth and achieving modest iPhone revenue growth in the low-single-digit range, with unit sales growing at a mid-single-digit pace. We envision Apple’s iPhone unit sales growing at a similar pace to the high-end of a maturing smartphone market. While we’re not overly bullish on long-term iPhone growth, we think that Apple’s moat will help the firm retain most of its current customers, thus making iPhone revenue more resilient than the ups and downs witnessed by other hardware-only smartphone makers. Longer-term, we model average revenue growth for Apple as a whole in the 4% range. We expect strong growth from Other Products (including the Watch and TV) and Services, but slower growth from larger businesses like iPhone, iPad, and Mac.