Analysts Remain Optimistic about Apple’s Services Growth

Adam Rogers - Author

Nov. 23 2018, Updated 5:15 p.m. ET

Analysts upgrade Apple on Services growth potential

In the last two articles, we’ve seen why Apple’s Services segment is critical to the company’s long-term growth. In late October, Jefferies initiated coverage on Apple stock with a “buy” rating.

Jefferies analyst Timothy O’Shea stated, “We believe AAPL’s stable iPhone business will serve as the foundation upon which it can build a massive, recurring and high margin Services business.”

The analyst expects Apple’s Services business to account for 25% of its total revenue in fiscal 2020, up from 16% in fiscal 2018. This segment is also expected to account for 40% of total gross profits by fiscal 2020.

Apple is set to leverage the benefits of its massive iPhone installed base, which stands at a whopping 700 million as of the end of fiscal 2018.

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Morgan Stanley reiterates its “overweight” rating

We’ve seen the drivers behind Morgan Stanley’s (MS) optimistic outlook for Apple’s Services business. Katy Huberty reiterated her “overweight” rating on Apple stock on November 8. The analyst raised Apple’s price target from $226 to $253.

Gaming and search ad businesses are key revenue drivers

The growth in the global mobile gaming industry is a key driver of Apple’s App Store sales. Mobile games account for 71% of total App Store revenue and 50% of revenue growth. Apple’s Search Ad business is also expected grow from $500 million in fiscal 2018 to $2 billion in fiscal 2020.

The chart above shows us that Apple’s app revenue easily outpaced Google’s (GOOG) (GOOGL) Play Store app revenue in the third quarter despite its much smaller user base.


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