Apple (APPL:NASDAQ) is reportedly developing its own advertising business which incorporates detailed user data, including the types of apps downloaded and news stories consumed, according to The Sunday Times.

If successful, this could provide a lucrative new source of income for Apple and could potentially see investors willing to pay a higher multiple of earnings to own the shares, triggering something called a ‘rerating’.

The emergence of Apple as a new heavyweight player in the advertising space would increase the competitive pressure on the two incumbent advertising leviathans, Meta (META:NASDAQ) and Alphabet (GOOGL:NASDAQ).

There are several ways in which Apple can grow its advertising business. First, it could make the app store more of a content discovery destination rather than purely a transactional mechanism.

Second, the group could monetise assets including Apple Maps or Apple TV, which currently have no advertisements, in a similar fashion to Google Maps and Roku.

However, the key challenge for Apple will be to leverage the privacy changes it has introduced, to create a search advertising business that can compete with current advertising incumbents.

Apple’s most notable advertising product is Apple Search Ads. It allows developers to buy keywords on the Apple app store to appear at the top of searches.

Last year Apple introduced ‘App Tracking Transparency’, a change to its privacy and data collection policy that requires all apps on the company’s iOS operating system to ask users for permission to share their data.

An article published in Insider in April highlighted analysis suggesting these changes could reduce Meta (which owns Facebook and Instagram), Alphabet’s YouTube, Snap (SNAP:NYSE) and Twitter’s (TWTR:NYSE) revenues by approximately $16 billion this year.

Data management company Lotame predicts Meta will be the largest casualty of Apple’s privacy changes in 2022, inflicting a $12.8 billion hit to revenue which equates to 10% of group sales.

In an interview last summer with CNBC, Evercore analyst Amit Daryanani said Apple’s $2 billon worth of advertising revenue in 2020 could increase tenfold to $20 billion by 2025.

Daryanani said if Apple developed an advertising business that monetised a potential installed base of 1.6 billion users it could generate top line growth of 6% to 8%.

He believed this would justify a price to earnings multiple for Apple in the mid-30s. This would be in line with a luxury goods retailer, or consumer staples company. Apple currently trades on 20 times forward earnings.

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