Apple's (AAPL) services revenue is a key story for bullish investors and analysts seeking to shake off pressures from slowing iPhone sales. That is, for everyone except those selling apps on the platform.
Shares of the Cupertino, California-based tech giant wavered in morning hours, largely as a result of bullish analyst takes on services revenue and comments from CEO Tim Cook staving off reports of further iPhone production cuts.
"We continue to believe the services business, poised to exceed $50 billion in 2020, will be the ultimate driver for the next phase of the Apple growth story set to take hold over the coming years with 190 million to 200 million iPhones shipping in both FY19 and FY20 based on our new estimates," Wedbush analyst Daniel Ives said in defense of his own bullish long-term outlook. "On a sum-of- the-parts valuation, assuming the services business valuation is roughly $400 billion on a standalone basis (this remains a big debate given it's an installed base driven services story), with $130 billion of net cash, and valuing the unparalleled iPhone franchise we believe the valuation is between $200 and $210 over the next year."
Such a recovery could signal a return to about a 16 to 18 times earnings PE multiple, something TheStreet's Jim Cramer noted is achievable and, in his view, justified.
Ives' outlook is in line with comments from Cook in a Tuesday evening interview with Cramer, in which he aimed at shifting the story of Apple to its broader ecosystem, including services, and away from a fine-point focus on slowing iPhone sales.
Down Shift Ahead?
As much as Cook highlights the shift to services, the segment is not without its own issues.
The problems mainly emanate from the company's app store, which is under fire from the very apps its serves as a marketplace for and even the U.S. Supreme Court.
Apple has traditionally taken a 30% cut of app transactions on the App Store, with some sellers receiving a reduced fee to about 15% based on the length of their stay in the store.
As an indicator of the move, the top-grossing iOS app of 2018, Netflix (NFLX) , removed iTunes billing for new customers, forcing them to sign up on Netflix's own site. The action is estimated to save the streaming service $256 million per year, which will provide a inverse impact on Apple.
Similarly, Spotify (SPOT) ended iTunes subscription billing in 2016 and Epic Games, maker of the famed Fortnite franchise, announced plans to open its own app store with a revenue share that lets developers keep an 88% cut.
"This should not come as a surprise," SunTrust analyst Matthew Thornton wrote of the shifts. "As mobile-first countries and households rise in the mix, commissions to the mobile app stores become a material headwind to margins."
Given the app store's hulking revenue production of the app store and its pivotal impact on services revenue just as it comes to the forefront, an exodus of developers could be a critical shift.
While many smaller developers will likely stay on board given the user base available on the platform, the cost-saving efforts of some of its biggest revenue drivers could present a problem for the services story moving forward.
The potential migration is only exacerbated by the company's legal issues with monopolistic app store practices that now stand in front of the Supreme Court.
"When you're looking at the relationship between the consumer and Apple, that there is only one step. I mean, I pick up my iPhone. I go to Apple's App Store. I pay Apple directly with the credit card information that I've supplied to Apple. From -- from my perspective, I've just engaged in a one-step transaction with Apple. And when I come in and say Apple is a monopolist and Apple is charging a super-competitive price by -- by extracting a commission that it can only extract because of its market power, I mean, there's my one step."
- Justice Elena Kagan explaining her view of Apple's monopolistic practice in the Court's opening arguments.
The combination of legal issues that could break the business model and major revenue drivers leaving its platform could provide problems for those forecasting strengthening service revenues in 2019.
While the services segment is a tap into a secular shift to mobile app usage in its biggest player, investors shouldn't be surprised if this segment too sees its share of bumps in the road.