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Apple Inc. (AAPL) Apps, iCloud and Music Will Offset Declining Hardware Revenues

Apple Inc (NASDAQ:AAPL) Apps

Apple Inc. CEO – Tim Cook – told CNBC that its service business, which includes the App Store, iCloud and Apple Music, will be the “size of a Fortune 100 company by next year.” The CEO was on air to celebrate Apple’s solid third-quarter, which had beaten the Wall Street expectations on both revenue and earnings.

Apple Inc. (AAPL) App Store

Services to offset decline in hardware

Apple reported revenue of $5.976bn in service specifically, slightly less from $5.991bn the quarter before. But the revenue is still 19% more from the same period in 2015. In addition, Cook is quite positive about the future earnings potential of the segment even when there has been some skepticism on Apple finding a groove in cloud-based services as it is mostly known for its hardware.

Apple Inc. sold 40.4m iPhones last quarter, more than what was expected. However, the iPhone sales are still down 14.9% from the same time last year. This is the reason why the tech giant is investing in its services business – if it cannot sell more iPads and iPhones, then the logical step ahead is attempting to make more money off the consumers you already have.

To improve its services, the firm has also invested big in machine learning. Such a technology helps in improving overall user experience like improved facial recognition in photos, better directions in maps, more relevant app recommendations and news and more accurate predictive text.

Apple CEO excited about AR, AI

With the emergence of artificial Intelligence (AI), the iPhones have become more popular, said Cook on Apple’s earnings conference call.  “AI makes it more and more important, as the phone becomes your assistant,” Cook said. “In terms of AR [augmented reality] and the Pokemon phenomenon, it’s incredible what has happened there.” The CEO said the company was investing to make sure its products worked fine with products like Nintendo’s AR game “Pokemon Go.”

In a note to investors last week, Needham analyst – Laura Martin – wrote that the iPhone maker revenue could generate as much as $3 billion over the next one to two years from “Pokemon Go.” Martin added that the success of the app underlined two important strengths for the iPhone maker that investors would probably not completely appreciate.

Apple Inc. is considered the distribution platform of choice for mobile content winners. The tech giant also had the wealthiest customer base and the game could generate upside to earnings, assuming the smartphone making giant collects its usual 30% on Pokemon GO’s iOS revenue.

“We have been and continue to invest a lot in this,” Cook said. “We are high on AR for the long run.”

On Tuesday, Apple shares closed down 0.69% at $96.67. Year to date, the stock is down almost 10% while in the last one-year, it is down over 22%. The stock has a 52-week high of $123.91 and a 52-week low of $89.47.

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Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.