Apple has been promoting its services division for more than five years as a growth engine that will offset the saturation of smartphones and bring in higher earnings for investors.
It’s possible that the impact of that tale is waning.
Apple surpassed expectations for both the top and bottom lines in its quarterly earnings announcement on Thursday. An otherwise better-than-expected report, however, had a weak point in the services sector. According to Refinitiv, the unit increased by 12 percent from a year earlier to $19.6 billion, falling short of the $19.7 billion average analyst projection.
It was also the weakest rate of growth for the services division, which includes Apple Music, iCloud storage, App Store sales, Apple Pay, and warranties, since the fourth quarter of 2015. It doesn’t appear that the current quarter will be any better. Due to general economic conditions and a strong U.S. currency, Apple CFO Luca Maestri predicted that the services industry will expand by less than 12 percent in the September timeframe.
On the back of strong iPhone and iPad sales that exceeded expectations, Apple shares increased during Thursday’s extended session. However, the downturn in services, which saw growth of 27% in the fiscal year 2021 and 16% in 2020, the pandemic’s first year, has Wall Street worried.
Investors usually approve of Apple’s expansion into the services sector because the offerings are more lucrative than hardware and frequently generate recurring income. In the most recent quarter, the unit’s gross margin, or the profit after deducting the cost of goods sold, was 71.5 percent, as opposed to Apple’s overall gross margin of 43.3 percent.
In a report released earlier this month, Morgan Stanley analysts predicted that if Apple concentrated on generating revenue from its present clientele through enhanced services, its long-term valuation might increase by 30%.
Erik Woodring, the analyst at Morgan Stanley wrote “We believe Apple shares undervalue the lifetime value of an Apple user,” which is a crucial investment driver, according to him, is the rise of the services industry.
According to Maestri, the services industry performed as expected. Furthermore, despite growth dropping to 12 percent, it continued to have stronger growth than the corporation as a whole, which expanded by only 2 percent.
The services division was impacted by the economy, according to Apple CEO Tim Cook. He specifically mentioned the company’s advertisements business, one of the lesser-known offerings.
“Digital advertising was clearly impacted by the macroeconomic environment,” Cook said. “It’s a mixed bag in terms of what we believe that we saw.”
According to Maestri, Covid-19 shutdowns may have also caused services growth to be “lumpy,” making year-over-year comparisons challenging.
“There have been lockdowns and reopenings and so on,” Maestri said. “So it’s very difficult to talk about a steady state growth rate for our services business.”
According to Maestri, the number of iPhone users is continually rising, indicating that the services industry may thrive by attracting new clients. He stated that the quarter saw record revenue levels for music, cloud services, AppleCare warranties, and payments.
The business made no mention of app store earnings or licensing costs, such as the sums Google pays Apple to serve as the iPhone’s default search engine. They are among the main service components, according to analysts.
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