Apple Finds Its Second Wind in Apple Pay and Apple Music

Will the new services provide viable support for iPhone sales?

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Dec 10, 2016
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With more than half a trillion dollars in market capitalization, Apple (AAPL, Financial) is one of the world’s largest companies but also one of the cheapest, trading at 13.6 times earnings and 2.85 times sales. The company that revolutionized the smartphone world saw its revenues slide due to a slowdown in worldwide smartphone sales this past year. With forecasts for smartphone sales from IDC and Gartner not looking rosy at all for the next few years, Apple will be looking at new product launches and emerging markets to keep smartphone sales moving. Unfortunately, even that may not be enough to match the pace of its growth in the last five to 10 years.

As Apple enters the slower growth pace stage for its number one product, the company has rapidly moved to improve its services portfolio - the only bright growth spot for the company last year. Apple services revenue grew 22% last year from $19.9 billion in 2015 to $24.34 billion in 2016. Though services only accounted for a mere 11.2% of its total revenue, Apple’s services revenue still has plenty of room to grow and help stabilize its product-based sales numbers in the future.

The two major services Apple launched in the last three years was Apple Pay and Apple Music. Apple Pay was launched in October 2014 and is now available in more than 10 countries, while Apple Music was launched a mere 18 months ago and has now reached 20 million users, putting segment leader Spotify under serious threat.

“Apple’s mobile payments wallet, Apple Pay, had a record quarter, said CEO Tim Cook on the company’s fourth quarter earnings call on Tuesday afternoon. Users of the mobile payments service completed more transactions in the month of September than the entire year of 2015, he added. Transaction volume was up 500% in the fourth quarter, compared to the same quarter in 2015.” - Fortune

The digital payments industry is just picking up speed, with Apple, Google (GOOG, Financial), Samsung and PayPal (PYPL, Financial) in the fray. Though nobody knows exactly how many Apple users are there around the world, it will be running in the hundreds of millions. Apple users sit at the high end of the product spectrum and as a result, their spending is also higher than an average Android user. Here’s an excerpt from a report on Black Friday 2015 by Business Insider:

“iOS users also spent and average $125.83, significantly more money than Android users, who spent $107.60, according to IBM.”

This can help Apple Pay’s growth despite the competition.

Apple Music’s growth has picked up pace during the second quarter of this year and, with nearly 20 million users, if Apple Music sustains the current growth trajectory it could become the number one player in the segment.

“It must be also be noted that Apple Pay (October 2014) and Apple Music (June 2015) are not even three years old and are already proving to be a hit. That validates what we’ve been saying all along – that tech companies looking to survive and grow over the next several decades must necessarily build robust ecosystems around their core products and services.

Google is a master of this strategy: everything they do outside of Other Bets is either designed to generate revenues or designed to drive traffic to revenue-generating parts of their business.

But Apple is yet to get its feet wet with this approach.” - 1redDrop.com

The fact that both these services were able to grow so fast in such a short period of time shows the inherent strength of Apple’s loyal user base. Of course, that does make one wonder why Apple waited for such a long time to start building its own services ecosystem instead of merely depending on App Store to keep Apple users - and their wallets - engaged.

Nevertheless, the slowdown in its main product line has made the company double down on its efforts on the services side, which is bound to grow at a fast clip for the next several years and provide lots of support for Apple’s top and bottom line.

Disclosure: I have no positions in the stocks mentioned above and no intention to initiate a position in the next 72 hours.

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