Apple’s emphasis on services to provide a path for future growth over a half decade ago led many to predict that such services would continue to provide returns for investors and pave the way for smart phone saturation.
That story may be losing some of its charm.
On Thursday, Apple delivered better-than-expected earnings reports. Although a problem area for a business, it was one of many strong points in a surprisingly strong report. Refinitiv estimates that the unit grew 12% year over year to $19.6 billion, falling short of the average analyst estimate of $19.7 billion.
That is the slowest rate of growth for Apple Music, iCloud storage, the App Store, Apple Pay, and warranties since 2015. Judging by the current quarter, it doesn’t look like the situation will improve. The Apple CFO, Luca Maestri, expects services to grow less than 12% due to tough macroeconomic conditions and a strong U.S. dollar.
Apple shares rose on Thursday because iPhone and iPad sales exceeded estimates. The slowdown in the services sector, which grew by 27% in fiscal 2021 and 16% in 2020, the first year of the pandemic, should concern Wall Street.
Apple is generally liked by investors, since its services are more profitable than its hardware and often generate recurring revenue. In the latest quarter, the company had a gross margin of 71.5%, while Apple has a gross margin of 43.3%.
Morgan Stanley analysts write that Apple’s stock may increase in the long-term by 30% if the company started to capitalize on the millions of Apple customers and to monetize their business model.
morgan Stanley analyst Erik Woodring cited services growth as a key investment driver in saying, “We believe Apple shares undervalue the lifetime value of an Apple user.”
According to Maestri, the business performed as expected. Even though it grew by 12%, it still outperformed the company as a whole, which expanded by 2%.
Steve Cook, Apple’s CEO, said the economic situation affected the services division. One of the company’s smaller services is the ads business, he said.
Clearly, digital advertising was impacted by the macroeconomic environment, Cook added. There is a mix of opinions in regards to what we saw.
Covid-19 shutdowns may have caused services growth to be lumpy, making it difficult to compare year-over-year, Maestri said.
We’ve had several lockdowns and a handful of reopenings, Maestri said. So it’s very difficult to talk about a specific rate of growth for our services division. Even though iPhone usage has been on the decline for the past couple of years, it is still rising and continues to attract new customers. Music, cloud services, AppleCare warranties, and payments all saw record revenue levels during the third quarter.
As for paying licensing fees, such as Google’s fees for serving as the default search engine on iPhones, or App Store revenue, the company didn’t discuss any of that. These are among the largest components of services, according to analysts.