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The App Store Is The Jewel In Apple's Services Crown, But Has Its Growth Peaked?

The App Store Is The Jewel In Apple's Services Crown, But Has Its Growth Peaked?

Pacific Crest Securities speculated in a note on Tuesday that growth at Apple Inc. (NASDAQ: AAPL)'s Services business may have peaked.

Pace Of Services Growth To Decline Significantly

Analysts led by Andy Hargreaves expect App Store growth of 32 percent in fiscal year 2017. The analysts indicated that the App Store generates over half of the Services segment's profit. Meanwhile, the analysts expect a significant decline in the pace of growth, going forward, as App Store sales per iPhone user, as well as iPhone user growth, decelerate.

Pacific Crest indicated that Apple Services segment, excluding App Store and Apple Music, which it expects to be unprofitable, generated a CAGR of 3 percent over the last three years. The slower growth of the other services, even after excluding the drag from iTunes, relative to the iPhone user base, suggests that Apple's organic software and services efforts are underperforming the overall platform, the firm said.

Therefore, the firm is of the view the Services business growth is unlikely to accelerate as iPhone user growth slows.


New Launches, Acquisitions Could Perk Up Growth

The firm expects market saturation to affect the iPhone user base, with the growth in the user base likely to dwindle from 14 percent in 2016 from a mere 1 percent in 2020. This, according to the firm, will commensurately drag Services revenue.

"Consequently, we believe incredibly successful new service launches or acquisitions are necessary for Apple to meet its goal of doubling Services revenue by 2020," the firm said.

Pacific Crest maintains its Sector-Weight rating on Apple shares, with a 12-month fair value at $145.

"Increased confidence in tax reform or the sustainability of iPhone gross margins could prompt a more positive view, while decreased confidence in iPhone pricing power would likely prompt a more negative view," the firm said.

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Latest Ratings for AAPL

May 2020B of A SecuritiesMaintainsBuy
May 2020Deutsche BankMaintainsBuy
May 2020WedbushMaintainsOutperform

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