Morgan Stanley says that amid slowdown in iPhone sales, Apple Services is where the growth is

Morgan Stanley says that amid slowdown in iPhone sales, Apple Services is where the growth is
With sales of the Apple iPhone slowing, how can Apple continue to grow its revenue by 8% annually? After all, sales of the company's iconic smartphone make up 86% of the tech giant's gross. According to a research report written by Morgan Stanley's Katy Huberty, Apple Services is growing fast enough to make up for slowing iPhone sales. Additionally, the services business has a higher profit margin which could help the bottom line as well as the top line.

According to Huberty, iPhone owners have stretched out the replacement cycle. This has been true for all smartphone owners in general ever since carriers eliminated subsidies and two-year contracts. Because phone buyers are paying for their handsets out of their own pockets, most of them are holding on to their smartphones for as long as possible. The analyst also notes that annual growth in the iPhone's installed base has slowed over the last two-years from 14% to a single-digit figure.

Huberty says that services and wearables will be the main drivers of Apple's growth over the next five years. If you're wondering how the Apple Watch will produce such growth, keep in mind that Apple's AR glasses are expected to be launched as early as next year and could be a big wearables winner for the company. As for Services, Apple has already been showing some decent growth in that department. Average Services revenue per device has risen at Apple from $25 two-years ago, to $30 at present. And Morgan Stanley says that it wouldn't be too much of a stretch to see that figure rise to $100 per device. The securities firm points out that Amazon has over 100 million users paying $99 a year for Prime, and Netflix has 111 subscribers paying $120 annually.

With only 18% of Apple's installed base subscribed to Apple Services, there is plenty of room for Apple to grow in this department. Especially considering that Apple Music subscriptions cover only 2.9% of Apple devices in use. Apple Pay is now supported by 50% of retail locations.

Even with all of the room that Apple has to grow, Huberty sees Apple's revenue will slip from an 8% annual compounded growth rate, to 6%. However, the analyst says that with an improving sales mix (meaning that Apple will see higher growth in its more expensive products) and its stock buyback program, earnings per share will grow from the average 8% annual growth seen over the last five-years, to 16% growth. And that is what investors like to see.

Katy Huberty has Apple rated "Overweight," with a price target of $203. The stock closed today at $168.84, down $2.43 thanks to fears of a global trade war.

source: Benzinga

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28 Comments

1. sgodsell

Posts: 7042; Member since: Mar 16, 2013

No crap, really? Over $500 to repair the glass back of an iPhone X, over $400 to repair an iPhone 8 plus, and $350 for the iPhone 8. No wonder why service is so good. With service like that. No need to bend over, because Apple is making you do that. With prices like that who cares if they give great service, because your wallet is raped.

2. Sammy_DEVIL737

Posts: 1529; Member since: Nov 28, 2016

But the article is all about the services like Apple Music which has shown growth from $25 to $30/device and some analytics saying that Apple's revenue will increase when they launch AR glasses & next gen Apple watch. It has nothing to do with repair services.

22. bucky

Posts: 3774; Member since: Sep 30, 2009

I’m typical fashion he isn’t here to read.

39. iushnt

Posts: 3083; Member since: Feb 06, 2013

@sgodsell Atleast, stop commenting without reading the article.

3. surethom

Posts: 1635; Member since: Mar 04, 2009

Apple need to buy back some more shares while it have so much spare cash, apple will continue to grow for a couple more years but with only a few devices I can see revenue falling a bit by 2023 ish & buy back will help them defend themselves from other shareholders.

4. TechSceptic

Posts: 1156; Member since: Feb 05, 2018

" Apple Pay is now supported by 50% of retail locations." You must be talking about the US only, because if you're talking about any other country in the world then it's just an outright lie. Apple doesn't make any effort at all to make their services available for people in Europe, as seen by their complete and utter lack of support for my country, which is Denmark. It's quite shocking too, as Denmark is certainly one of the countries where IOS has its highest market share, as it accounts for around nearly as high a percentage as Android does, which is a rare thing. Even in the US IOS has a lower market share.

7. meanestgenius

Posts: 21618; Member since: May 28, 2014

Things like services (and software) is going to be what pushes growth for smartphone OEM’s. Hardware alone isn’t going to cut it for anyone indefinitely, even Apple. Apple should definitely focus more of its resources on its services. They’ve got some great services going for them.

9. toukale

Posts: 617; Member since: Jun 10, 2015

This is what a lot of folks are not getting. Apple will be fine, since they are the platform holder, something none on the android side enjoys since Google fills that role. Once the Chinese vendors took over boy it will be like a red wedding for those vendors. Apple will continue to introduce more services, sometimes this fall I will look for them to launch a video streaming service. That service will be number 2 in 3-5 years behind Netflix, just like they are now with music streaming.

10. mootu

Posts: 1449; Member since: Mar 16, 2017

Services is already Apples biggest earner. Last quarter they earned over $8 billion from services. $6 billion from iPhone sales. $5 billion from "other" which includes Beats, Watch, iPad, Mac etc.

11. airoid

Posts: 126; Member since: Dec 13, 2016

Amazing! How can Netflix survive with only 111 subscribers?

18. Sammy_DEVIL737

Posts: 1529; Member since: Nov 28, 2016

Lol....

12. gamehead unregistered

I hope the slowdown means cheaper phones

17. toukale

Posts: 617; Member since: Jun 10, 2015

Nope, look at the pc market. Not only have the pc market slowed, but it retracted a bit for a while. Noticed what happened, prices went up instead. There should not be any surprises here, the pc market showed us exactly what to expect. We might get cheap devices in places like India and Africa because of the earning potential of those users, but don't expect devices to get cheaper here in around first world countries.

23. TechSceptic

Posts: 1156; Member since: Feb 05, 2018

Alright, please do not talk about things that you have no clue about. The prices didn't rise because sales slowed down, the prices rose because the scum of the earth, also known as Cryptominers, bought all the stock of PC components, such as gaming GPUs, to use for their mining rigs. CryptoMiners singlehandedly ruined the PC gaming market by causing the prices to skyrocket, as they bought all stock for their massive mining rigs. That was the cause, not what you're claiming. f**k Cryptominers, they're scum.

25. toukale

Posts: 617; Member since: Jun 10, 2015

@techsceptic - Another loser who thinks ps slowdown just started a year or so ago. Why don't you educate yourself before you call others out and make a fool of yourself..

37. TechSceptic

Posts: 1156; Member since: Feb 05, 2018

You freaking moron, please learn to read before responding to me, you're wasting my time. I'm talking about the prices, as indicated by the fact that it's the first thing i mentioned in my response. Let me quote it, since you're clearly incapable of reading: "The prices didn't rise because sales slowed down(...)" I was talking about price the whole damn time, and yet you're talking about the market slowdown. Stop wasting my damn time. Don't respond if you don't understand what you're responding to.

36. worldpeace

Posts: 3106; Member since: Apr 15, 2016

"ruined the PC gaming market" Not really, they just ruined GPU market.. If you want to make gaming PC right now, your only choice for GPU is the cheap 1050ti for $170 or 1080 for $500, and literally nothing in between (1060 and 1070 always out of stock, and even it available, the price will be far from MSRP). (AMD GPU is even worst, lol..)

38. TechSceptic

Posts: 1156; Member since: Feb 05, 2018

"Not really, they just ruined GPU market.." Please tell me what the main difference in hardware is between a normal office computer and a gaming computer? That's right, it's the GPU that is main difference. You can not have a gaming computer without a proper GPU. It's the exact reason people spend most of their budget on the GPU when building a gaming computer. Lastly, there isn't any cheap 1050TI or 1080's, that was the point of my comment. You won't find any of those cards for a cheap price in my country, they're still out of stock in many places and expensive if they are in stock.

26. Vokilam

Posts: 1153; Member since: Mar 15, 2018

Looks like Apple had a good foresight if you can go by anything... Samsung probably gonna invest into services soon - it's a good idea. For the record, I'm in the majority - didnt buy any new devices in past 2 years - no iphones, no tablets, no androids...

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