Services growth on track to deliver big long-term payout for Apple, analyst says

Posted:
in AAPL Investors edited March 15
An analyst claims that Apple is on track for its services business revenue estimates so far, and any large acquisitions it may make will just accelerate the growth driven by the iPhone 7, and successor "iPhone 7s" and "iPhone 8" devices expected in 2017.




Amit Daryanani of RBC Capital Markets writes in a note to investors provided to AppleInsider that in order to hit Apple's services projections, the company would have to grow revenues from the division by 18 percent over the next four years. On the average, Apple has grown services by 21 percent per year, over the last five years.

Daryanani estimates that the largest contributors to the Services division are the App Stores, iTunes and Apple Music, AppleCare and Apple Upgrade Program, Licensing, and the Genius Bar, in order. Customer loyalty to the brand, and the synergistic benefits that Apple's services provide for users reportedly contribute to Apple's services revenues more than other companies' offering to their users.




The growth numbers may be impacted positively by the so-called "super cycle" that appears to be approaching with the "iPhone 7s" and "iPhone 8" release, as well as any large acquisitions. Other factors cited in the report are a quick Mac or iPad refresh cycle, or an "iTV launch" -- which is not elaborated upon in the investor's note, but is presumably the oft-rumored "over-the-top" cord-cutter's video streaming service.

Revenues are expected to remain high, as most of the gross margins exceed that of the hardware that utilizes the services. The App Store is estimated to be 85 percent gross margin, with Apple Pay delivering 80 percent, iCloud margin hitting 75 percent, and AppleCare and service parts around 70 percent.




Apple Music and iTunes maintain a low gross margin at about 15%. While iTunes revenue is decreasing, iTunes memberships are on the upswing, in conjunction with greater adoption by the public of leasing music, rather than owning a large collection.

Daryanani calls Apple Music's sector "very unpenetrated" in relation to the installed user base, and a "very attractive opportunity" for user growth.




On the strength of services and the upcoming "super cycle," RBC Capital Markets is increasing its Apple stock price target to $155, and is expecting year-over-year revenue growth for the foreseeable future. Most of the potential risks to the increase could be considered self-inflicted, with Daryanani listing "execution stumbles," "greater-than-expected iPod cannibalization," and "channel conflicts or execution" as theoretical problems that could impact the estimates.

During Apple's July 2016's earnings conference call, CEO Tim Cook said that Apple's Services business is expected to be the size of a Fortune 100 company at some point in 2017. In January, Services earned Apple $7.17 billion, 13 percent higher than the previous quarter, with the division posting the largest gain on a percentage basis of all of Apple's business segments.

Comments

  • Reply 1 of 11
    igorskyigorsky Posts: 288member
    Amazing how quickly the narrative changes.  Two quarters ago Apple was described as a dying, bloated dinosaur...talk about "fake news".
    edited March 15 SpamSandwichpalominewatto_cobrabaconstang
  • Reply 2 of 11
    jason98jason98 Posts: 729member
    "Music remains a very under-penetrated" - seems like it is given as a positive sign while I think it is more like a negative one. It's been almost 2 years for the service and only 3% of user share? 
    But unlike Tim Cook, we know how to fix it - just share some of your iCloud margins and throw in the 200gb tier for free for all Apple Music subscribers. That simple.
    edited March 15 brucemcwatto_cobra
  • Reply 3 of 11
    Wasn't Amit one of the analysts who repeatedly stated the iPhone had peaked, Apple was doomed, Apple couldn't innovate, Apple needed to sell a cheap iPhone in China, the iPhone 7 was boring and more?


    watto_cobra
  • Reply 4 of 11
    ppietrappietra Posts: 160member
    These kind of numbers would imply that iPhone gross margins are significantly lower than what has been estimated, something like 40-42% instead of 50-60%. That makes me doubt their estimate.
  • Reply 5 of 11
    SpamSandwichSpamSandwich Posts: 25,972member
    ppietra said:
    These kind of numbers would imply that iPhone gross margins are significantly lower than what has been estimated, something like 40-42% instead of 50-60%. That makes me doubt their estimate.
    Good rule of thumb:  "Never trust an Apple analyst."
  • Reply 6 of 11
    carnegiecarnegie Posts: 112member
    ppietra said:
    These kind of numbers would imply that iPhone gross margins are significantly lower than what has been estimated, something like 40-42% instead of 50-60%. That makes me doubt their estimate.
    I would have guessed around 50% aggregate gross margins for Services. But I could easily believe that they're a little lower or a little higher - 60% would be near the top of what I would, absent more information from Apple, consider the possible range and 45% would be near the bottom of it. (Guessing what they are in the aggregate can be tricky because Apple uses different methods to account for different kinds of revenue included in the Services category - e.g., iTunes content is accounted for differently than App Store content is.)

    As for the iPhone gross margin, a little over 40% is what I'd expect - at least for FY 2016. It really couldn't be much higher. I'd say around 45% is the limit of what seems plausible. I don't see how anyone could think it was above 50%, not based on the information Apple has provided. If it was 50% (for FY 2016), then the aggregate gross margin for iPads, Macs and Other Products would have to be 12% or lower.

    Apple has said that gross margins for Macs are lower than company averages, and I'd expect the same to be true for iPads. But I wouldn't expect their margins to be in the 10-15% range. Apple has also said that aggregate gross margins for Services tend to be higher than company averages, so that means 40% plus for 2016. 

    Some numbers to support what I said about the margin for iPhones: Apple reported a gross profit of $84.3 billion for FY 2016. That represents a gross margin of 39%. If the margin for iPhones was 50%, that would mean that $68.4 billion of that came from iPhones (50% of $136.7 billion). That only leaves $15.9 billion. Services must have accounted for at least $9.7 billion (40% of $24.3 billion), and likely accounted for more than that. That only leaves $6.2 billion. The revenue for iPads was $20.6 billion, the revenue for Macs was $22.8 billion, and the revenue for Other Products (e.g. Apple Watch, Apple TV, iPods, Beats) was $11.1 billion for a total of $54.6 billion. A maximum gross profit of $6.2 billion from $54.6 billion in revenue means an aggregate gross margin of less than 12%.
    edited March 15
  • Reply 7 of 11
    anomeanome Posts: 587member
    Wasn't Amit one of the analysts who repeatedly stated the iPhone had peaked, Apple was doomed, Apple couldn't innovate, Apple needed to sell a cheap iPhone in China, the iPhone 7 was boring and more?


    So is other words, he's an analyst? Haven't they all said that?
  • Reply 8 of 11
    FatmanFatman Posts: 65member
    iPod cannibalization is a risk!? Did they forget to delete that statement from 7-9 years ago? The greatest risks:
    1. Chinese government reimbursed android knock off phones flooding the market.
    2. Supply chain issues (pricing, supply, vendors)
    3. Unfavorable US and Foreign government regulation, tariffs and tax laws.
    AppleInsider readers know more than some of these analysts.
    Macsplosion
  • Reply 9 of 11
    ksecksec Posts: 1,254member
    >>Apple Music's sector "very unpenetrated" 

    May be because it is not any good?
  • Reply 10 of 11
    ksec said:
    >>Apple Music's sector "very unpenetrated" 

    May be because it is not any good?


    It is a pretty good catalogue.

    It has radio stations.

    It allows you to create playlists, or opt for curated playlists if you are adventurous.

    It recommends songs and artists.

    It supports streaming and off-line play.

    It is supported on all your iOS devices and your PC/ Mac.

    The tagging and song identifying bugs seem to have been ironed out.


    I fail to see how you can say it isn't any good.

    watto_cobrasmiffy31
  • Reply 11 of 11
    Fatman said:
    iPod cannibalization is a risk!? Did they forget to delete that statement from 7-9 years ago? The greatest risks:
    1. Chinese government reimbursed android knock off phones flooding the market.
    2. Supply chain issues (pricing, supply, vendors)
    3. Unfavorable US and Foreign government regulation, tariffs and tax laws.
    AppleInsider readers know more than some of these analysts.
    Add another point.

    Improvement in quality of user experience (reasonably fast I.e. no/little lag, better battery life than iphones, decent camera quality, good enough display - all for$200 to $300) in Android mid range phones, which could potentially cause few (very small percentage) people to jump ship to Android
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