iAd Could Earn Apple $2 Billion and Provide a 5% Upside to Apple’s Stock

Apple (NASDAQ:AAPL) introduced the iAd advertising platform last week to help iPhone and iPad app developers monetize apps.  This move further puts Apple in competition with companies like Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) which are looking to tap into mobile advertising.  Mobile advertising is especially important for Google which depends heavily on its internet search ads business.  We estimate that about 68% of Google’s stock comes from the value of its internet search ads business.

We estimate that iAd can generate about $5 billion in gross ad revenue annually and that Apple, which will take a 40% cut of ad revenues, will earn about $2 billion annually from iAd, with the remainder going to the app developers.

In comparison to the potential $5 billion in gross iAd revenues, we estimate that paid apps will generate about $600 million gross revenues in 2010 and Apple’s cut of 30% will earn it $180 million in net revenue app revenue.

Below we explain how we came up with the $5 billion gross iAd revenue estimate and how there could be a 5% upside to our $267 Trefis price estimate for Apple’s stock if the forecast were to materialize.

100 Million iPhone, iPad and iPod Touch Devices

Apple indicated that there are currently around 85 million iPhone and iPod Touch devices in use.  We estimate that there will be around 100 million devices, including iPads, by the end of 2010.  These devices are the platforms on which developers can develop applications and iAd can serve ads.  User demand for applications has been high and we estimate that there will be more than 6 billion app downloads in 2010.

1 Billion Potential Ad Views per Day

Apple estimates that the average iPhone / iPod Touch user spends 30 minutes per day on apps.  If Apple’s iAd platform were to deliver an ad every 3 minutes, that implies that an average of 10 ads are shown per day on each iAd-capable device.  Based on our expected 100 million device estimate above, that means there will be about 1 billion ad views per day for all Apple devices.  This figure will grow over time as the number of devices in use increases and if users continue spend significant amounts of time using free apps.

iAd Net Revenues Will be $2 Billion

AdMob, a mobile ad company recently acquired by Google, estimates that ad rates for the iPhone are around $14 per 1,000 impressions.  Applying this figure to the 1 billion ad view estimate above and scaling it for a full year (x 365 days) gives us a gross ad revenue estimate of $5 billion for the first full year that iAd is in use.  As mentioned above, Apple’s cut is currently set to be 40%, implying net revenues of $2 billion for Apple.

Potential 5% Upside to Apple’s Stock

Although we have not yet updated our Apple analysis to reflect the long-term potential of Apple’s iAd business, a comparison with our estimate for the value of Apple’s new iPad business suggests that there could be more than 5% upside to our $267 Trefis price estimate for Apple’s stock.

We estimate that Apple’s iPad constitutes about 4% of our $267 Trefis price estimate for Apple’s stock.  We forecast that the iPad business will generate about $1.3 billion in gross profits for Apple in 2010 and that this will increase to slightly over $2 billion over the next four years.  In comparison, our estimates above indicate that iAd can generate $2 billion of gross profits (net revenue) for Apple in the first full year.  This suggests that the iAd business will be more valuable than Apple’s new iPad business.

We will be updating our analysis for Apple to reflect the iAd business.  In the meantime, you can view our full model for Apple’s stock here, including our Apple’s new iPad business and the impact of paid apps.