Apple Inc.’s (AAPL) stock got a big lift thanks to a strong showing in its service revenue during the fiscal second quarter, but at least one Wall Street analyst is skeptical, saying the growth in recent months may have more to do with one time items than with a growing trend.
With iPhone sales cooling down for the Cupertino, California-based technology company, it has been shifting its focus to Apple Services which includes the App Store, Apple Music, iTunes, Apple Pay, iCloud, AppleCare and other services. Revenue grew 31% in that area during the fiscal second quarter, compared with growth of 13% in the fiscal first quarter. Apple said services revenue was up 18%.
Apple Services Revenue Growth Skewed?
And while Wall Street and investors rewarded the $9.2 billion in revenue the unit had in its fiscal second quarter, Bernstein analyst Toni Sacconaghi says the results are skewed thanks to one time items. Including those the analyst, according to U.S. News & World Report, said services revenue was up 24% in the fiscal first quarter and 27% in the second quarter representing 3% quarter-over-quarter growth. The analyst credited a lot of the service revenue growth to Alphabet’s (GOOG) Google. “Our analysis suggests that licensing (primarily [traffic acquisition cost] payments from Google) may have accounted for essentially all of services' 600-basis point acceleration in growth,” Sacconaghi wrote, noting that Google will likely make $4 billion to $5 billion in payments to Apple this year. (See more: Apple Traders Bet Stock Will Rise 9% to New Record.)
Sacconaghi predicted that services revenue growth at Apple will slow down in the second half of the current fiscal year as it faces tougher year-over-year comparisons. He is still upbeat about the services business over the long haul. “While we still doubt that services can sustainably grow at 20 percent-plus without new services offerings, we now see Apple as likely to hit its bogey of doubling services to $49 billion by the end of [fiscal 2020],” the analyst wrote, according to U.S. News & World Report.
Apple All In With Services
Aiming to continue to grow its services revenue, Apple has been inking more partnerships, engaging in acquisitions and working on new services. Earlier this month reports surfaced the company is gearing up to start selling third-party video subscription services directly through its TV app. The service should be available next year, opening up the possibility to enable customers to eventually stream content directly from its TV app. It also recently acquired magazine subscription service Texture and plans to roll out a paid subscription service centered around it. Users of Texture pay $9.99 a month to access more than 200 magazines.