By Sam Boughedda
In a deep dive looking at Apple's (NASDAQ:AAPL) traffic acquisition costs (TAC) and advertising segment, Barclays analysts told investors there are "some risks, but also big potential rewards."
The analysts, who have an Equal Weight rating and $145 price target on the stock, wrote that TAC and advertising are the "second largest revenue contributor in services."
"While only at a mid-single-digit of total revenues, we estimate it is at 12% of total AAPL EPS due to 90%+ gross margins for TAC," they added.
Barclays estimates that 35% of Google's (NASDAQ:GOOGL) TAC goes to Apple, while for Apple's own advertising, they estimate $5 billion in 2022, growing to $7.5B in 2023, driven mainly by ads on the App Store, but they believe it could move to other apps.
"The hype of Bing/ChatGPT could pressure Google to re-up the TAC deal with AAPL, maybe at higher rates," said the analysts, who believe Apple could also develop its own search.
"We believe AAPL advertising on its own apps is under-appreciated. Most ad revenues are generated on the App store, with some contribution from News and Stocks," they continued. "This could expand to other apps like Maps, TV+, Podcasts, etc. We believe Apple's DSP and SK AdNetwork position the company for further growth."