Apple: Not Just A Hardware Company Anymore

Apple (NASDAQ:AAPL) has been talking up its services prospects over the past year or so, and the business does look like it's got legs.

Not just as an app eco system that supports and feeds its bigger hardware business, serving as the glue that keeps users deeply engaged, but also as a legit business in its own right. In fact, it seems to be the other way round now, with the installed base of a billion-plus devices driving App Store sales, Apple Music subscriptions, Apple Pay, Apple Care, iCloud storage and whatnot.

Apple doesn’t want to talk about individual contributions yet, but has said that total paid subscriptions across its service offerings jumped 20 million in the last quarter to 185 million.

At 27 million (according to Apple in June), Music subscriptions are still a small part. But despite the growing competition from Spotify, Amazon (NASDAQ:AMZN) and others, Apple can potentially sell the service to more than a billion customers today.

Apple Pay, the wallet that allows you to pay in-store, in-app and on the web, also has great potential. According to a March 2017 survey by pymnts.com, up to 24% of mobile phone users have used Apple Pay, with a similar percentage saying they didn’t know how it works and around 39% saying they use it when they remember to use it. An increasing number of people find it easier and faster to use than swiping a card.

According to a study by Juniper Research in April, Apple Pay will nearly double its user base to 86 million this year from 45 million in 2016. New locations (Apple added Italy in May and will have UAE, Denmark, Finland and Sweden operational by year-end. Total signups from Apple Pay, Samsung (KS:005930) Pay and Android Pay will be 150 million meaning Apple’s share will be about 57%.

iOS 11 will also help because with that will come Apple Pay peer-to peer payment in the U.S. Most of the revenue currently comes from international markets, so increased penetration in the U.S. also offers growth opportunity.

But the crowning glory and the main driver of the 22% growth in Apple’s services business is the App Store. Management said that according to App Annie’s latest report, it remains the preferred destination for customer purchases, generating twice the revenue of Alphabet (NASDAQ:GOOGL) -owned Google Play (Google also has an ad-supported version, so this may not be the best, apples-to-apples comparison).

To Conclude

The growth in Services is a really big deal for Apple, because it will mean goodbye to the seasonal fluctuations that are a part of a hardware-focused business, especially when the concerned hardware make good holiday gifts. Or at least, the seasonal impact will be reduced by the predictability of the services business because it typically grows over time as customers use more and more services.

Apple shares carry a Zacks Rank #3 (Hold), but you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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