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Apple’s Push Into Healthcare Should Move the Needle for the Stock

support@smarteranalyst.com (Ben Mahaney)

Apple’s (AAPL) next major market opportunity could be healthcare, which is expected to become a significant revenue contributor in the foreseeable future. While the opportunities in healthcare sound a bit generic, perhaps the growth narrative tied to Apple Watch should be examined even closer, as it’s perceived as Apple’s gateway device into the healthcare segment of the market where global healthcare revenue of $7.5 Trillion is more significant than smartphone revenues.

There’s a number of assumptions tied to the growth thesis of Apple Watch, and Apple’s healthcare related services. Such as the exploration of healthcare cost subsidization from health insurers where companies like Aetna or United Health could subsidize the cost of buying an Apple Watch, for health insurance policy holders. This expands the prospective customer base if you then include generic health insurers or government sponsored programs as well, which would effectively diminish the cost burden of buying an Apple Watch altogether, similar to the telecom carrier phone subsidization model where iPhone’s are discounted because of the assumed revenue the telecom anticipates from the mobile subscription.

In the case of health insurers, the bias for providing the Apple Watch for free to policy holders is the anticipated cost savings from fewer doctor’s visits tied to diagnostics and preventative care. This also assumes the amount of silicon content tied to health monitoring within Apple Watch devices increases, and the applicability of the Apple Watch suite expands upon each iterative update of the Apple Watch line-up. Assuming there’s a health insurer model tied to Apple Watch the revenue growth narrative seems more believable. There’s reason to anticipate adoption from at-risk age cohorts, or those who are more likely to suffer from heart-related issues (75M Americans have high blood pressure and 100M have diabetes according to CDC estimates). Therefore, the healthcare implications sound fairly promising, but more importantly, there’s an expectation that healthcare plans might cover or subsidize the cost of the Apple Watch depending on the patient health condition, which could apply to a relatively large segment of the current U.S. population.

But, what about the younger demographic that’s less prone to health risk? Apparently, teenagers or current gen-Z cohorts perceive the Apple Watch as a highly desirable fashion accessory even when compared to well-established luxury brands or apparel. Attitudes towards Apple Watch differ among the younger-cohort versus the older-cohort, but both are trending favorably. The older cohort might be forced to adopt the Apple Watch due to varying health conditions/complications whereas the younger demos might purchase an Apple Watch to keep up with the Jones’s and to monitor their athletic activities while brandishing their new favorite fashion accessory, hence there’s an exodus of demand for varying watch brands in comparison to Apple Watch based on a recent survey conducted by PiperJaffray.

Source: PiperJaffray Taking Stock with Teens Spring Survey

The survey indicates that 80% of the teenage demographic has no intentions of purchasing a watch in general over the next-year, and even if the number 1. watch brand is perceived to be Rolex among teenagers, the pricing for these watches ($10K to $50K) doesn’t amount to much in the way of purchases that are likely to occur, because parents don’t buy their kids Rolex for Christmas, but the pricing of the Apple Watch is comparable to most of the other top brands on the list ($400), which in turn diminishes the friction for broadened adoption among this cohort who view Apple’s smart watch as the second most attractive fashion accessory even when compared to a number of other respectable fashion brands. The appeal of Apple Watch has trended higher consistently from a base of 12% of survey respondents in Fall of 2017 to 22% of survey respondents in spring of 2019 viewing the Apple Watch as their preferred watch brand. So, the younger demographic is steadily adopting the Apple Watch, but for different reasons, but as a baseline it does establish a “coolness factor” when compared to older-buyer demographic attitudes.

Morgan Stanley analyst Kathryn Huberty  in her report released on Monday:

We see healthcare as a $15-$313B revenue opportunity for Apple by 2027. At the mid-point, Apple’s health efforts could result in ~$90B of annual revenue by 2027, roughly ~35% of its current revenue base. From the bottom up, we believe the clearest paths to monetization are wearables… Sustained 40% growth in wearables alone implies Apple would reach the low end of our $15-$313B target by 2021. We think new health monitoring sensors such as body temperature, blood pressure monitoring, or blood glucose monitoring would significantly broaden the appeal of Apple’s wearables offering and push Apple into the low end of our range. Reimbursements and subsidies from health insurers, where Apple is already demonstrating progress represent a longer-term driver.

Source: Morgan Stanley

The base case implies that a $15B opportunity when pertaining to strictly hardware, but the mid-point estimate is a blend of growth in hardware and service-tied revenue, and this is dependent on Apple creating a number of services tied to Apple Watch, such as healthcare service management suites, or record/data sharing systems that Apple can develop and then deploy access to those records from its network of healthcare providers generating fee revenue (which there’s a decent number of hospitals that may pay Apple to manage patient record management). Also, the second other major opportunity is the data storage of patient records and accessibility via patients, which the data storage opportunity via its Cloud Suite was estimated at $20.2B incremental revenue by 2027 for warehousing appx. 940 exabytes of healthcare data, which can then interact with Health Kit and Research Kit when aggregating both the wearable data points and management of healthcare data on behalf of providers.

There are plenty of assumptions tied to Apple’s healthcare growth, but in terms of positioning and where its ecosystem is likely to pivot, the next major area where Apple can anticipate growth is from healthcare. Wearables could become one of the biggest diagnostic and medical device categories, and with Apple’s relative dominance in the consumer electronics segment, and implicit scale with its installed base of nearly 1B iOS users there’s very little friction in terms of ecosystem when compared to what sparse alternatives currently exist. Assuming Apple does sustain momentum with its development of next-gen Apple Watch it will have an incumbency and network effect advantage, which will be perceived positively by shareholders.

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Disclosure: The author has no position in Apple stock.

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