Thu. Apr 18th, 2019

Apple’s services revenue growth is slowing down as it looks for new ways to fight weak iPhone sales, RBC says

Tim Cook, Apple CEO

Apple’s services revenue, which the company has touted as a burgeoning source of growth, may actually be slowing down, according to RBC Capital Markets. In a note published Sunday, analysts wrote that Apple’s services revenue has slowed to 18 percent year-over-year growth in the December quarter, compared with estimates of about 27 percent.

While RBC laid out a number of reasons for the slowdown, the analysts wrote that assuming there is not a structural issue at play.

“We think investors are better off remaining positive here given attractive valuation and high probability for services to re-accelerate later in 2019 via new offerings,” RBC said, noting that the fresh services will likely be new options to buy content from Apple. RBC said the stock is still undervalued given its more than $126 billion in net cash, giving it a base case of $185 per share. Apple’s stock was down 1.5 percent at Monday’s close.

Apple has faced intense scrutiny over slowing iPhone sales, which the company has argued will be offset at least in part by its services revenue. In an interview with CNBC’s Jim Cramer last week, CEO Tim Cook said, “You will see us announce new services this year. There will more things coming.”

One driving factor for slowing growth could be the lack of AppleCare purchases, RBC wrote. With fewer people upgrading their Apple products as quickly as before, there is less opportunity for customers to add on the company’s warranty service. Another factor could be Google’s traffic acquisition cost payments to Apple that allow it to be the default search engine on Apple products, analysts wrote, though there is limited visibility into the deal.

A third reason for slowing growth may be that developers, including large players like Netflix, are circumventing Apple’s fees. Netflix no longer lets new subscribers sign up for its service through its iOS app, the analysts wrote, in order to avoid the 30 percent app store cut on developer revenues that some call the “Apple Tax.” RBC wrote that developers on both iOS and Android seem to be avoiding app store fees, reducing Apple’s ability to bring in revenue from content produced by developers.

[“source-cnbc”]