8 Sep

Apple Finds New Profits in Services and App Store

WRITTEN BY Aditya Raghunath

Apple (AAPL) has been banking on iPhone growth to be a key sales driver since its launch in 2008. The iPhone accounted for the majority of sales for Apple. In fiscal 2013 (ended in September), the iPhone accounted for 53.4% of sales. This figure rose to 55.8% in 2014, 66.3% in 2015, 63.4% in 2016, 61.6% in 2017, and 62.8% in 2018.

iPhone sales shrink amid competition

However, the iPhone accounted for less than 50% of total sales in the June quarter. The slowing iPhone growth is a cause of concern for investors. The global smartphone market has matured and Apple is finding it difficult to generate demand for its flagship product.

But this slowdown in iPhone sales will be offset by growth in Apple’s Services segment. Apple’s Services segment has been the company’s fastest-growing business for awhile. Services sales rose 12.5% in 2014, 10.2% in 2015, 22.3% in 2016, 23% in 2017, and 24% in 2018.

Services is Apple’s fastest-growing segment 

Services sales reached $37.19 billion in fiscal 2018. Comparatively, Netflix (NFLX) reported sales of $15.8 billion in 2018. At one point, Apple Services’ trailing twelve-month sales were comparable to that of Facebook.

Apple’s high-growth business is bigger than most Fortune 100 companies. It accounted for 9.4% of sales in 2013. This rose to 9.9% in 2014 and then fell to 8.5% in 2015. However, Services then accounted for 11.3% of sales in 2016, 13.1% in 2017, and 14% in 2018. It’s now Apple’s second-largest segment in terms of revenue. Right now, it remains critical for the company’s long-term growth.

Apple App Store sales grow at a robust rate

This Apple Insider report states Morgan Stanley (MS) expects the App Store revenue to experience its highest “month-to-month acceleration” since 2015. The report claims, “The net revenue for the App Store grew 25.8% year-on-year in August, up from the 18.9% year-on-year comparison for July, making it the strongest since February 2018, and the third-largest month-to-month acceleration in year-on-year growth since early 2015.”

We have seen that China drove Apple Store sales in July. China continued to drive App Store sales in August as well. Morgan Stanley estimated China’s spending to rise by an impressive 31.8% year-over-year in August. Apple Insider suggests that the gaming industry in China has started to experience robust growth after its government lifted suspensions for gaming licenses.

App Store sales rose to $25.5 billion in Q1 2019

Sensor Tower had estimated Apple’s App Store sales of $25.5 billion in the first six months of 2019. This was an increase of 13.2% compared to sales of $22.6 billion in the prior-year period. While Google’s (GOOGL) Play Store revenue rose 19.6%, sales were still considerably lower at $14.2 billion in the first two quarters of 2019.

The online dating application Tinder was the highest non-gaming grossing app and accounted for $497 million across the App Store and Play Store. Other popular non-gaming applications included digital video platforms Netflix, Tencent Video (TCEHY), YouTube, and iQYI.

The App Store accounts for the majority of Services sales. The other verticals in this segment include Apple Music, Apple Care, and Apple Pay.

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