Could mobile advertising be Apple's next big thing?

Aug. 07, 2022 12:00 PM ETApple Inc. (AAPL)AMZNBy: Rex Crum, SA News Editor40 Comments

Apple Posts Record Quarterly Earnings

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When it comes to Apple (NASDAQ:AAPL), there's no secret as to what is responsible for the company's staggeringly high revenue numbers.

That, of course, would be the iPhone, which in Apple's (AAPL) most-recent quarter accounted for $40.7B of the company's nearly $83B in sales. Even 15 years after it was first introduced, the iPhone remains such a juggernaut that it regularly makes up more than 50% of Apple's (AAPL) sales during the Christmas and end-of-the-year holiday quarter.

And then there is Apple's (AAPL) services business, which includes everything from Apple TV+ to iCloud storage plans to Apple Music monthly subscriptions. Services have become such as cash cow for Apple (AAPL) that they totaled more than $19B in Apple's (AAPL) recently completed fiscal third quarter.

The company also still brings in billions of dollars in revenue from sales of iPads, Mac computers, Apple Watches and other products. However, those sales all declined on a year-over-year basis during Apple's (AAPL) third quarter. And with inflation showing no signs of slowing down, and concerns about an economic recession growing daily, it serves that Apple (AAPL) needs to find a new area of revenue growth. And that might just be in mobile advertising.

Needham analyst Laura Martin said that there have been growing signs that Apple (AAPL) is in the early stages of building its own mobile-ad platform that could end up being a "meaningful" driver of earnings and revenue for its services business. Martin based her beliefs, in part, on Apple's (AAPL) sheer size, and how another tech giant, Amazon (AMZN) built its ad business from $4B in 2018, to $37B this year.

"Apple is the largest company on Earth," Martin said. "To grow, it must target large global TAMs [total addressable markets], like global digital advertising." Martin cited data from eMarketer which said that the TAM for digital advertising will reach $600B the year, with mobile advertising making up about $450B of that amount on an annual basis.

One of the keys to Apple (AAPL) making a success of an advertising business would be the creation of what is called an "demand side platform" [DSP]--a software platform that lets customers buy ads with the assistance of automation technology. DSPs look through a network of publishers in search of sites and mobile apps that meet an advertisers criteria and then make bids for the placement of ads. Martin said such a setup would play to Apple's (AAPL) history of creating a universe where all of its products and services work together across company-supported tech platforms.

"If it builds a DSP, Apple (AAPL) can control how and where its data gets used," Martin said. "And can prevent data leakage outside their 'Walled Garden.'"

Martin said signs of Apple's (AAPL) "larger advertising ambitions" can be seen in the company recently posting a job opening for a senior manager for its DSP in its ad-platform business. Also, Apple (AAPL) attended the Cannes Lions advertising festival in June, which Martin said suggests that Apple (AAPL) "wants to drive awareness among marketers that it is in the advertising business."

Martin added that building up an advertising business would also play into Apple's (AAPL) already massive customer base of 1B unique users, and 1.8B active devices around the world. And that universe of customers and products presents an opportunity for advertising that would be hard for Apple (AAPL) to ignore.

"Virtually all time spent by consumers on Apple devices is on mobile," Martin said. "Therefore, we expect Apple to target the global mobile advertising market."

Meanwhile, recent research from Morgan Stanley suggests that's Apple's (AAPL) App Store is showing signs of slowing revenue growth.

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