Cowen Remains Positive on Apple Pay; Sees as Key to Further Hardware Sales (AAPL)

Cowen and Company is commenting on Apple's (Nasdaq: AAPL) Apple Pay after recently taking another look at the unit. Cowen currently rates Apple at Market Perform with a price target of $130.

Analyst Tim Arcuri offering the following commentary after Cowen launched coverage on the Financial Technology sector:

From an AAPL perspective, we continue to see Apple Pay as a medium to improve the user experience for a ubiquitous task - payment for goods and services. While Apple would ideally like to maximize direct revenue from Apple Pay, we think Apple's angle is ultimately to expand the ecosystem and SELL MORE HARDWARE by offering a better and more secure user experience. To prove the point, in a wildly optimistic scenario around Apple Pay's global acceptance and sustainability of interchange fees many years down the road, we estimate an ultimate TAM of ~$5B/yr (~$12B/day of debit/credit, US a little less than half of global transactions, interchange going to 5bps). Even this pie-in-the-sky scenario represents only ~2% of AAPL total revenue. Put a different way, this is the same as selling only an incremental ~6MM iPhones/yr.

Apple has taken a very intelligent approach as it is not dis-intermediating any aspect of the payments food chain and makes it easier for consumers to part with more of their money (good for business). Apple Pay is positive for the networks (given their cherished role as token providers and their central role in "greasing" acceptance), neutral to slightly positive for the acquirers (should small tickets go to cards), and potentially positive for bank processors to the extent they are able to provide issuer tokenization services. Indeed, the only party sharing economics under the Apple Pay model are the issuers (who have agreed to share interchange w/AAPL (we estimate ~15-20bps of the transaction value)), who themselves may come out ahead if the mobile platform is successful in converting low-ticket cash transactions to electronic payments. Leveraging the existing rails, Apple is ultimately going after the fragmented Android ecosystem as its solution is uniform and tightly controlled, enabling it to quickly gain critical mass with retailers.

Another angle is the potential use of Apple Pay for online transactions. Once the credit card data is stored securely in the Apple Pay hardware and usable in tokenized form with a finger print swipe, it's not a great leap to develop a securitization methodology to substitute for the NFC used for in-person purchases and we would not be surprised if Apple did so while making use of some unique hardware based encryption. Online payments may be the next frontier and Apple may be able to justify a higher fee or just further improve ecosystem stickiness with the ever-present goal of selling more hardware.

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