Appleit is (AAPL -0.15%) make a big push in publicity, and he might reach his long-term goal in just a few years.
Earlier this year, advertising vice president Todd Teresi said he wanted the advertising business to generate billions in double-digit revenue for the tech giant. That’s a big step up from the roughly $4 billion it reportedly generated in fiscal 2021. A new estimate from Insider Intelligence, however, puts the company’s annual global ad sales at $10.7 billion by the end of 2024.
Here’s what’s driving advertising’s rapid growth and what it means for investors.
A billboard in your pocket
Apple has made several changes over the past year or so that have fueled significant growth in the advertising industry.
Last summer, it instituted app tracking transparency in iOS 14.5. After iPhone owners updated their devices, they were continually asked if they wanted their various apps to be able to collect data about all of their activity on their iPhone. Unsurprisingly, the vast majority said they wouldn’t like it.
As a result, it has become much more difficult for companies like Metaplatforms to track the conversion of their advertisements and to collect important targeting data for their advertisements. So it was hard to justify top marketers paying for ads on Facebook and Instagram or other social media companies.
Ad dollars came out of social media, and some of those ad dollars went into Apple’s pockets. Apple’s App Store search ads showed much better value after it became impossible to track the conversion of app install ads on other platforms.
As these ads grew in value, Apple also decided to expand its ad inventory. It started showing ads on more surfaces in the App Store app, such as “today” and third-party app pages. It also displays ads in stock and news apps. Apple has considered several other places where it could stick advertising products, including Maps, Podcasts, and Apple TV+, especially around MLS content.
Finding or growing new inventory for ads is likely a key part of Apple’s advertising strategy going forward as demand for its ads has increased. It would also develop a demand-side platform for ad buyers, allowing it to scale the business and make it easier for marketers to automate and manage ad campaigns across more ad types than Apple. can offer.
The growing importance of advertising for Apple
Advertising falls under Apple’s services segment, which has quickly become, by far, Apple’s second largest line of business after the iPhone.
Admittedly, advertising still represents only a tiny fraction of Apple’s total revenue, which amounted to $394 billion last year. It’s even a small part of the services segment, which generated $78 billion last year.
But there is another element included in advertising in Apple’s accounting besides ad sales to marketers. Apple also includes traffic acquisition costs (TACs) paid by Alphabetit is (GOOG 1.76%) (GOOGL 1.68%) Google for placement in Safari and Siri as the default search engine. These payments were estimated at $15 billion. The total TAC for Google increased by nearly $4 billion or 12% in the first nine months of the year, with growth primarily driven by payments to channel partners (like Apple).
But Google’s payout hike might not be as big next year or the year after. Advertisers are cutting spending amid economic uncertainty, and while the search ads industry is a reliable source of sales, those sales may not be as plentiful.
Apple probably doesn’t want to rely on the whims of a third party to generate a significant revenue stream for its services business. He could face a situation where he needs or wants to sever ties with Google — that would certainly fit with his focus on data privacy — at any time in the future, and he doesn’t want to sacrifice billions to do so. He may also want to create his own search engine, a move that Insider analyst Andrew Lipsman estimates could earn him $15 billion in revenue a year.
As Apple charts a path to $10 billion in advertising revenue in a short period of time, investors should be looking for ways the company can expand its high-margin business to boost shareholder profits.
Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Adam Levy holds positions at Alphabet, Apple and Meta Platforms. The Motley Fool holds positions and recommends the Alphabet, Apple, and Meta platforms. The Motley Fool recommends the following options: $120 long calls in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.