Barron’s: The problem with Apple’s Services business…

How to confuse a function with its first derivative.

From “The Risks to Apple Are Rising, So Why Are Investors So Bullish?” in this week’s issue ($):

[Apple’s] stock now trades at 16.4 times projected earnings for the next 12 months, well above its five-year average of 13.7 and near a five-year peak of 17.7. Investors have been paying up for the stock on the idea that Apple is moving away from its hardware focus toward a more predictable services- and software-driven model.

The problem is that Apple’s services business remains a question mark and could still disappoint. The segment actually missed analyst estimates by $200 million in the June quarter, with sales up 13% year over year, versus 16% in the prior quarter.

Moreover, KeyBanc Capital Markets Andy Hargreaves expects Apple’s services growth rate to subside over the next year. “Services business is tied to growth in the user base,” he says. “And the user base is definitely decelerating.”

My take: Decelerating, sure, but still growing (see interactive chart below; not seeing? Try here).

So what, again, is Apple’s Services “problem”?

See also: How Apple plays the Ecosystem Game


  1. Gregg Thurman said:
    Man bites dog.

    Glass half empty.

    No the metaphor used, this is worthless tripe.

    August 5, 2019
  2. Fred Stein said:
    Thanks for the YoY growth view, Philip. 10%+ growth in user base is excellent. For a 40 year old company, its miraculous. More so, considering that Apple does not grow its market by acquisition. (Beats products provided new products to the existing users.)

    August 5, 2019
  3. victor castroll said:
    i came away unscathed Joe. in fact, i’m up

    now, regarding decelerating services. myopic. #af.

    on the eve of introducing a physical payment method, this will look stupid in a years time.

    dumb dumb analyst.

    August 5, 2019
    • Aaron Belich said:
      So, Vic et al, how low are we going this time? Will AAPL and the rest the market work it’s way down to another 12/24/2018? Or are we just doing the 1Q dance and stop around -15-25%?

      August 5, 2019
      • victor castroll said:
        hey aaron,

        i’m expecting a ppt djt tweet before market opens.

        unlike most analysts, i’m sticking to my 180 eoy target. but i’m happy buying here, esp after seeing  card possibly being rolled out this week. so, i think they’re might be another 5% down but we’re closer to the bottom than the top.

        everyone’s missing services.

        August 5, 2019
        • Aaron Belich said:
          Agreed on the missing Services part.

          Lots of dollars there to get sucked up. TV+. Arcade. Factor in the install base.

          August 5, 2019
  4. Gregg Thurman said:
    All of Apple’s purchase/supplier contracts are USD denominated. With China’s devaluation of the Yuan today an investment in Hon Hai might be very prudent.

    Also, much has been said/written about Xi playing the “long game” as though he can. Frankly, when comparing the reciprocal trade import to the US and China, China is at an extreme disadvantage.

    US purchase of Chinese goods accounts for about 5% of China’s GDP, while Chinese purchase of US goods accounts for less than 1% of US GDP. China depends on GDP growth of about 6% per annum. Without US trade that growth rate is severely impacted, which in turn severely impacts China’s expansionist objectives.

    A prolonged trade war is going to negatively impact China 5X more than it will the US. Consumer impact will be a case of perception as US news reporting focuses on (and exaggerates) the negative, while China’s news is heavily curated by the government to minimize the negative.

    Trump, rightly or wrongly, has extended the imposition of tariffs twice to encourage a trade agreement. Neither extension has brought about an agreement, ergo, I do not think Trump will back down on implementing tariffs in the future unless and until there is a signed agreement in place. Even then, in the future, I think he will pull the trigger quickly if the Chinese don’t follow through on the agreement.

    As an aside, I went shopping over the weekend for a few items. I checked the “Made in…” label (something I never bothered with in the past) and made a conscious decision to avoid anything made in China. I was surprised at how few of the items I shopped for was made in China. Vietnam, Malaysia, and Mexico led the non-US list.

    If India was smart (not sure they are) they would be aggressively taking advantage of this trade conflict to encourage Indian manufacturing. The business environment is ripe for a move out of China to anywhere without a geopolitical goal of domination.

    August 5, 2019
    • David Drinkwater said:
      “If India was smart (not sure they are) they would be aggressively taking advantage of this trade conflict to encourage Indian manufacturing. ”

      This one sentence alone earns an upvote.

      August 5, 2019
  5. victor castroll said:
    i think our domestic issues ironically gives both men the opportunity and optics to put ego aside and come to a resolution.

    between hong kong and domestic terrorists, both men and nations have much bigger fish to fry.

    August 5, 2019
  6. Paul Brindze said:
    Hope your right on the bigger fish comment, Victor.

    Trump also will be feeling pressure on the farmer vote. I think that he really needs to fix the agriculture boycott part of this, and soon.

    August 5, 2019
  7. Gregg Thurman said:
    “Trump also will be feeling pressure on the farmer vote. I think that he really needs to fix the agriculture boycott part of this, and soon.”

    The US should out agriculture as an import offset.

    The only profits made in US agriculture are derived from government subsidies, ergo we are shipping US tax revenue overseas and claiming the sale as income that offsets foreign imports.

    What’s worse is that the US government must borrow to “balance” it’s revenue and expenses. Much of that borrowed cash comes from foreign governments, which means we are borrowing (paying interest on) in order to subsidize shipments of US agriculture overseas. And for those countries that can’t afford the heavily discounted price of US agriculture we give them grants and very low interest loans (that are mostly written off 5-10 years later), all to support a virtually non-existent “family” farmer.

    In the meantime US subsidized agriculture prevents poor(er) nations from competing on the open market, perpetuating their poor status.

    Whet do this subsidies get the US consumer? Politically motivated advancement of specific food that are destroying the health of the American people. By that I mean corn (corn syrup), sugar beets and sugar.

    Fifty years ago there was virtually no instances of adolescent Type 2 diabetes. Today it’s an epidemic, all caused by the “non-fat” people (non-fat tastes terrible until you add sugar) and the proliferation of sugar enhanced foods. Sugar is known by many different names, but is always a carbohydrate.

    Agriculture as a trade issue is a farce and always a shell game that benefits a very few at the expense of the very many.

    August 6, 2019

Leave a Reply