An Apple video game streaming service could turn into a $40 billion revenue business by 2025
The latest talk on the Street is that consumer electronics giant Apple (NASDAQ:AAPL) — which has been rattled by slowing iPhone growth recently — is looking to make a move in the mobile gaming sector. Specifically, five people familiar with the matter told Cheddar that Apple is planning to a launch a video game subscription service soon.
Although Apple stock didn’t really budge on the news, investors should be aware that this is big news. Apple is in desperate need of innovation and service expansion to compensate for what is stalling out iPhone growth. The problem is that Apple is so big ($260 billion in revenues projected this year) that even a $5 billion expansion business hardly moves the needle for Apple stock.
That isn’t the case with mobile gaming.
If Apple were to successfully create the Netflix (NASDAQ:NFLX) of video games for phones, tablets, and computers, this is a potentially $40 billion-plus business opportunity by 2025. It could also add well over $10 billion in operating profits.
Numbers like that make mobile gaming more than just a needle mover for Apple stock. A subscription mobile gaming service could be the next big catalyst for Apple stock which recharges growth and takes investors minds off of peak iPhone sales.
As such, not only is this an opportunity Apple should 100% pursue, but it’s also something that investors should monitor closely. If Apple does announce official intentions to launch such a service, that would be a signal to start getting more bullish on Apple stock.
Mobile Gaming Could Be The Next Big Thing
Here’s the thing that people are starting to figure out about monetizing digital consumers: if you make a subscription service and package a bunch of good stuff into that subscription service, then you can optimally and consistently monetize tens and even hundreds of millions of digital consumers.
Think Amazon Prime. Amazon (NASDAQ:AMZN) just bundled all of its commerce and entertainment perks into one subscription that now over 100 million U.S. households pay for every month. Or think Netflix. They just bundled all the content they could gather into one subscription that now nearly 150 million households around the world pay for every month. Spotify (NASDAQ:SPOT). Hulu. Disney’s (NYSE:DIS) ESPN+ or Disney+. Same story.
This subscription model has, time and time again, successfully worked in monetizing digital consumers. At the current moment, it’s largely unproven in the video game industry. But, that’s mostly because companies haven’t figured out a way to stream games over the cloud. It’s a tall order, and much more complex than streaming movies and TV shows.
That’s all changing now. Technology has improved to a point where the biggest video game publishers, like Electronic Arts (NASDAQ:EA), are making big pushes into cloud gaming. As such, it’s only a matter of time before subscription services forever change the way consumers pay for video games.
Apple is in a prime position to make this pivot on the non-console side of this market (smartphones, tablets, and PCs). Across its ecosystem of products, Apple controls 7% of the PC market, 22% of the smartphone market, and 72% of the tablet market. Thus, millions of consumers are already playing mobile and PC video games through the iPhone, iPad, and Mac computers, meaning that launching an Apple mobile video game subscription service is just a few steps away from what’s already happening today.
If Apple does follow through on these plans, the company could one day be running a $40 billion-plus video game subscription business.
This Is a $40 Billion-Plus Opportunity for Apple Stock
Most growth initiatives don’t move the needle for Apple stock. That isn’t the case with a potential video game subscription service.
According to Newzoo, the global games market measured in at $135 billion revenues in 2018. Only $38 billion was from the console market. Thus, the global smartphone, tablet, and PC games market had revenues of nearly $100 billion last year. Moreover, the smartphone gaming market grew by 14% last year. The tablet gaming market grew by 8%. And the PC market grew by 3%.
Thus, this is a $100 billion and still steadily growing market.
By 2025, I predict that more widespread adoption of smartphones, tablets and PC games, coupled with deeper nonconsole gaming engagement, will push this market to nearly $170 billion in revenues.
To be sure, Apple won’t control this entire market. But, Apple does control 7% of the PC market, 22% of the smartphone market, and 72% of the tablet market. Breaking down each category and calculating Apple’s opportunity, I conclude that an Apple smartphone, tablet and PC video game streaming business could reasonably have around $40 billion in revenues by 2025.
This business will likely run at Netflix-like margins. I’ve long stated that the long-term goal for Netflix operating margins should be 30%. Same is true with an Apple game streaming business. A 30% operating margin on $40 billion in revenues implies an operating profit opportunity of $12 billion.
Those numbers are big enough to move the needle for Apple stock. Apple is projected to do about $260 billion in revenues this year, and did around $70 billion in operating profits last year. Thus, an Apple game streaming service could reasonably boost revenues and profits by 15% over the next several years.
For Apple stock, which is trading at just 12X forward earnings, that’s a big move.
Bottom Line on AAPL
At this point in time, an Apple game streaming service is just a rumor. But if at any point in the future it becomes more than a rumor, that will be the time to get a little bit more bullish on Apple stock.
A potential video game streaming service is the exact catalyst that could “wake up” Apple stock, and push the stock back to all time highs.
As of this writing, Luke Lango was long AAPL, AMZN, SPOT, and EA.
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