Macquarie Research’s Benjamin Schachter (a bull) and Instinet’s Jeffrey Kvaal (a bear) take ten paces and turn.
From Apple Shootout: What Does the Big Leap in Services Mean?, posted Tuesday by Tiernan Ray:
Both authors note the 31% jump in [Apple Services] revenue, to $9.19 billion, was a surprise… Both analysts come up with similar assessments of what’s happening, namely that Google was a big part of it, along with Apple Care and the App Store… But their conclusions as to the future are different.
Here’s Schachter saying what matters is things are already ahead of what Tim Cook provided:
The bottom line is that while growth from GOOG search revs and Apple Care will moderate, and the App Store is too reliant on growth from games (particularly China), AAPL’s Services is ahead of schedule in terms of doubling revs by FY’20 from FY’16. Services remains a key growth driver for AAPL profitability (and potentially margin and multiple expansion).
Here’s Kvaal writing that services growth won’t be sustained at this level, and that the price of the stock already reflects the current health of services:
While Apple cited licensing as a growth driver, we are loath to rely on sustained growth given Google’s statement that its TAC payments would slow. We suspect the AppleCare uptick was at least partially driven by sales of the iPhone X and thus growth should relent as the X mix declines. We conclude Services should exceed its prior 20% growth – by a bit. App Store and subscription growth should lead growth in Services above its prior rate. We estimate the underlying iOS subscriber base retains healthy growth. However, abating tailwinds from licensing and AppleCare may make 30% growth an aspirational target. We model a return to 25% growth in FY19; it may come sooner.
Schachter: Outperform, $195. Kvaal: Neutral, $175.
My take: Good to see two heads being knocked together.