Apple’s services arm protects it against the COVID meltdown

It’s hard to be ready for what’s coming

Apple’s investment in developing its services offering continues to deliver real benefit to the company, driving margins and boosting the corporate bottom line, analysts at Needham & Co and Morgan Stanley agree.

Dominance at the high end

Laura Martin at Needham & CO explains why this matters most succinctly:

“The right way to think about AAPL’s valuation, pricing power, competitive advantage period and barriers to entry (our view) is through the lens of its ecosystem dominance among the wealthiest smartphone owners in the world,” she writes.

The analyst explains that services are boosting user revenues while also reducing customer churn, which essentially means not only that Apple is grabbing high value customers, but that it is convincing them to keep shopping with the company and encouraging them to stay.

How it makes a difference

She notes some of the ways the company’s focus works to encourage people to stick with its platforms:

1. a) add-on hardware products like tablets, watches, air pods and home pods;
2. b) add-on services such as Apple Music, Arcade, Apple+, etc;
3. c) family plan pricing that makes it very expensive for anyone in a family to leave AAPL’s ecosystem;
4. d) iPhone trade-in pricing also discourages consumers from leaving AAPL’s ecosystem.

The analyst points out that services revenues rose 17% in the last year, up to $13.3 billion in the just gone quarter, contributing a mighty $8.7 billion to the bottom line.

That’s a services margin of around 65%, she said. The number of paying subscribers climbed 32% in the last year, reaching 515 million.

The analyst notes all-time highs in in-app purchases, third party, Music and iCloud subs.

App, App and away

Morgan Stanley analyst Katy Huberty echoes a similar sounding tune. She estimates that  App Store net revenue climbed 31% year-over-year in April to $1.7 billion, the strongest growth since September 2017.

Huberty observes App Store downloads grew 40% year over year, the strongest since 2015, growth was experienced across Apple’s top ten App Store territories, bar Australia, she notes.

“These results continue to confirm that the app economy is healthy and that the App Store will remain a beneficiary of social distancing and increased mobile engagement,” Huberty  wrote.

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