Decline of In-App Revenue Not a Concern for Apple
Apple’s stock has taken quite a beating lately, still down 30% from where it was in October. Revenues may be a concern, but not so much in-app revenue.
Apple is both one of the world’s largest companies and a real market darling historically, and many investors have profited greatly over the years from holding it. Stocks do run hot or cold though, and Apple’s stock is currently on the cold side to be sure.
Apple closed at $232.07 on October 3, which happened to also be a day where the stock market peaked. Apple did fall during the ensuing correction as most stocks did. The market rebounded on December 26, but Apple didn’t but in its recent bottom until January 2, at $142.19.
While the market suffered a 20% decline during this time, Apple’s was almost twice as big, where it gave back 39% of its value. Apple’s beta is 1.11, so that would explain a small part of the difference, but this particular beta came in around 2, so that tells us that there is more going on here with the stock.
As it turns out, Apple has fallen upon a bit of a hard time in terms of its earnings, mostly due to slowdowns in iPhone sales and the prospects of this getting worsened by tariffs, or as Trump calls them, “sanctions.”
Loss of this Revenue Should Not Be Concerning
With everything that we do have to worry about right now about Apple though, there is one thing that Bernstein Research analyst Toni Sacconaghi tells us we should not be worrying about, and that’s the concern over Apple losing in-app revenues.
Sacconaghi told clients on Friday that the reduction in Apple’s in-app revenue “is not a concern of ours. In fact, it’s not even a top 7 concern.”
With all of Apple’s recent disappointments and risks, investors might be prone to using this data as a means to use this to pile on and perhaps come away with a view that this news is more important than it actually is.
What really matters in the end with a company is what the overall profits are, or changes in overall profit as outlooks and predictions change. While Apple may earn quite a bit of money from their apps, we need to look at this from the perspective of its overall contribution to the company’s bottom line.
Several popular technology companies are cutting back on their business relationship with Apple, and in some cases looking to circumvent current processes, like Spotify, the makers of Fortnite saving money by getting subscribers to enroll in their own app instead of getting the actual game app from the Apple store, where Spotify would avoid what they have called the “Apple tax.”
Netflix has joined the battle as well and Netflix is a pretty popular subscription service indeed. The money that gets shaved off these subscriptions is money that no longer goes into Apple’s pockets, and this revenue is virtually pure profit to Apple.
Revenue from Apps Does Not Contribute Much to the Company
The services sector is the fastest growing part of Apple, which in-app revenue has helped drive. This therefore may seem like bad news for Apple, especially the loss of the Netflix in-app revenue, but it turns out that this is a very small piece of the pie.
Apple CFO Luca Maestri points out that Apple’s largest grossing app only contributes “0.04% of the company’s overall revenue for the fiscal year 2018.” That’s a small amount indeed, although we’re only looking at one app, and the impact here may be than that.
However, it isn’t that much greater to have us wanting to say that this was a meaningful enough event to want to change our outlook on either the company or the stock. This is why Bernstein isn’t concerned much about this, and there does not appear to be a good reason to either.
It’s not even that the Netflix money is completely going away, as Apple will continue to get a 15% share of subscription fees for those who had previously subscribed to Netflix through Apple’s app, even though new subscribers won’t be added to the base going forward.
While it is possible that we may see many more online services break off with Apple, and that may make sense given the potential savings involved, Sacconaghi does not believe this will happen.
He does have his concerns about Apple though, as many do right now, but he feels that “the fundamental business behind the App Store will be fine” in spite of these recent rumblings with the risk of more.
The app store is a lot more than deals with internet subscription services for a cut of their revenue. Apple’s Services sector is far more than this, and while the Services sector is one of the things that people are worried about, these developments just don’t amount to much.
Apple’s stock has risen by about 10% from its January 2 low, including a 1% move on Friday. Apple has outperformed the market instead of underperforming it over this time.
There’s still a long way to go to get back to where it was less than 4 months ago, and we may not see that for some time given the company’s current outlook, but we’re at least moving toward that now, for now anyway.
Editor, MarketReview.com
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