Lion's share of Apple's revenue expansion after 'iPhone 8' expected from services growth
Given the Apple iPhone user base expansion, Apple's Services business led by the App Store is forecast to not only be the prime mover of Apple's income expansion, but also be the largest contributor to gross margin improvements as well.
Ben Schachter from Macquarie Research sees about 75 percent of total Apple gross profit through fiscal year 2021 coming from services. Gross margin gleaned on the App Store is estimated to be about 90 percent, AppleCare at 70 percent, and all other services including iTunes, iCloud, Apple Pay sitting at 64 percent.
Services revenue is expected to grow 17 percent per year through 2021, hardware revenue will climb 2.4 percent, with a continuation of about 30 percent annual growth in Apple's App Stores per year. Driving the expansion is subscription service growth, even with a lower percentage of those payments going to Apple.
"The App Store is one of the best business models ever created," Schachter said in a note to investors, a copy of which was provided to AppleInsider. "Apple investors need not rely on Apple for all the innovation to drive the model forward. If someone creates a game in their parents' garage in Taipei or if GE revolutionizes health care with an app, Apple can benefit."
Schachter believes that the value of the services revenue is not given enough weight by analysts, as Apple reports App Store revenue on a net basis, rather than a gross basis like it does for other products.
The prediction model that puts Services at the top of Apple's revenue drivers assumes limited hardware growth after the "iPhone 8" release, and no significant new businesses such as a large expansion into subscription video -- which Schachter believes is possible.
Apple's Chief Executive Tim Cook may agree with Schachter's predictions. During July 2016's earnings conference call, Cook said that Apple's Services business is expected to be the size of a Fortune 100 company at some point in 2017.
As a result, Schachter has raised the Apple share price target to $148 from $133, and earnings per share to $9.10.
Earlier in January, Apple heralded a year that saw $20 billion paid out to developers in 2016 alone. According to Apple, the App Store's subscription billings grew significantly in 2016 to $2.7 billion, up 74 percent from 2015.
Apple's rumored "iPhone 8" is said to feature next-generation technology like an OLED "wraparound" screen with Touch ID home button and other sensors embedded behind the glass. Recent rumblings out of Apple's East Asian supply chain suggest the device will ditch aluminum for forged stainless steel as part of a "glass sandwich" design reminiscent of the iPhone 4 series.
Ben Schachter from Macquarie Research sees about 75 percent of total Apple gross profit through fiscal year 2021 coming from services. Gross margin gleaned on the App Store is estimated to be about 90 percent, AppleCare at 70 percent, and all other services including iTunes, iCloud, Apple Pay sitting at 64 percent.
Services revenue is expected to grow 17 percent per year through 2021, hardware revenue will climb 2.4 percent, with a continuation of about 30 percent annual growth in Apple's App Stores per year. Driving the expansion is subscription service growth, even with a lower percentage of those payments going to Apple.
"The App Store is one of the best business models ever created," Schachter said in a note to investors, a copy of which was provided to AppleInsider. "Apple investors need not rely on Apple for all the innovation to drive the model forward. If someone creates a game in their parents' garage in Taipei or if GE revolutionizes health care with an app, Apple can benefit."
Schachter believes that the value of the services revenue is not given enough weight by analysts, as Apple reports App Store revenue on a net basis, rather than a gross basis like it does for other products.
The prediction model that puts Services at the top of Apple's revenue drivers assumes limited hardware growth after the "iPhone 8" release, and no significant new businesses such as a large expansion into subscription video -- which Schachter believes is possible.
Apple's Chief Executive Tim Cook may agree with Schachter's predictions. During July 2016's earnings conference call, Cook said that Apple's Services business is expected to be the size of a Fortune 100 company at some point in 2017.
As a result, Schachter has raised the Apple share price target to $148 from $133, and earnings per share to $9.10.
Earlier in January, Apple heralded a year that saw $20 billion paid out to developers in 2016 alone. According to Apple, the App Store's subscription billings grew significantly in 2016 to $2.7 billion, up 74 percent from 2015.
Apple's rumored "iPhone 8" is said to feature next-generation technology like an OLED "wraparound" screen with Touch ID home button and other sensors embedded behind the glass. Recent rumblings out of Apple's East Asian supply chain suggest the device will ditch aluminum for forged stainless steel as part of a "glass sandwich" design reminiscent of the iPhone 4 series.
Comments
Perhaps Apple will end up having a built-in transportation app on the iPhone home screen that allows users to hail a self-driving car from a variety of partners. It could be kind of cool to open up the Transportation app and decide that today I'd like to be driven to work by a Tesla, tomorrow a Mustang.
But anyway... however it plays out, I'm sure Apple will try to participate in the transporation-as-a-service market, and that market will be huge.
That's because the consensus (or perception) is that Apple is shit when it comes to services / cloud / AI / ML or anything cloud related. This article represents a growing sentiment I've noticed more than ever this year.
https://medium.com/adventures-in-consumer-technology/apple-inc-a-pre-mortem-568d1a0b7d72#.5xnea5um1
Maybe you should take a job at apple and fix everything.
Not sure 2.4% growth on h/w as an average reflects the potential of Apple Watch and AirPods though.
I think Amazon, Google, and Microsoft are a few steps ahead of Apple in the broader scoped service related areas. This may be an opportunity for Apple to expand and scale up and out its successful integrated device model, i.e., where they tailor the device software, hardware, and integration to build a better smartphone (iPhone) than most of the competition, to include the services layers as integral components of their core products. While iCloud provides some reasonable integration and interoperability capabilities it's mostly geared towards storage and people-to-people messaging and connectivity within Apple's own application portfolio. As far as I understand at a high level, iCloud is not really providing much in the way of application hosting services, PAAS, SAAS, IoT device integration, or much of anything else and especially where third-party and end-user contributors to the ecosystem are concerned. I suppose things like the Apple-GE collaboration, HomeKit, HealthKit, and other related initiatives are setting the stage and laying down infrastructure for a larger services push that will unfold in coming years.
In any case, when looking at services growth I think we need to look beyond the App Store. It's a great parts bin but it's a small piece of a much larger services play.
Apple has chosen to officially report their App Store revenue as the 30% they keep. That is why the margins are expected to be very high.