Apple Inc. (AAPL) Health Alert: Services Flatlining

Apple Inc. is really a services company. That was the key line on the firm just a year or two ago as iPhone sales began to slow. The idea was simple, as iPhone user growth slowed, Apple would focus on adding valuable software and services to the device. Healthcare was supposed to be at the very center of that matrix, but right now it appears to have fallen off the map.

The mood behind the firm in recent months has shifted from services back to the iPhone. This year we’re going to get an iPhone “Supercycle” if Wall Street is correct. The reason for this, if the firm is looked at closely, is starkly clear. Apple hasn’t made its new services profitable, and sales growth is slowing down. Nowhere shows this quite as well as the firm’s health segment.

Apple Inc. Healthkit fails forward

Apple Inc. has been driving the iPhone, and its other devices, as a health monitoring service since 2014. The firm’s iOS, since version 8, comes with a “Health” app. On top of that the firm has supplied Healthkit, a developer API, in hopes that software makers will build out more robust health apps on its platforms.

This, hasn’t really happened, or at the very least it hasn’t happened in any significant sense.

Most of the apps that function with Healthkit are based around exercise, dieting and fitness rather than true healthcare. The’re calorie counters and pedometers for the most part. Though there are a few insulin trackers and the like thrown in.

Right now it’s very clear that the service is of very very little use to medical professionals. Integration with medical records has not yet become a part of the services. That is still rumored to be an upcoming feature, but rumored Apple launches these days have been canceled a lot more often than carried through.

“Planet Apple” is a dying world

It’s not just Health that’s failing for Apple Inc. , the firm’s entire services division appears to be under a cloud right now. The firm’s Apple News service is apparently ready to pivot as publishers get frustrated at the inability to make money from readers using the app.

Even Apple Music, the firm’s streaming service, isn’t thought to be profitable. That’s despite users spending $10 or so a month to get access to the music library.

That number isn’t uncontroversial, and it’s hard to prove because Tim Cook’s firm doesn’t break down sales in its services segment. Andy Hargreaves, of Pacific Crest, said he believed the streaming service was unprofitable in the wake of the firm’s June earnings report.

He added that he expects growth in the services sector to slow down as the number of iPhone users in the world stops increasing so briskly. That prognosis a long way away from the optimism with which the Apple services model has been talked about since the firm began building it out.

Hargreaves reckons that growth in services across the board is going to sit at just 3 percent CAGR through 2020. That means the firm’s plan to double its services business before that year is almost bound to fail.

Brian White of Cantor Fitzgerald, in a report published in June of 2015, said that Apple was worth $195 per share because of the future cash flow from services. He called this collection of software and services “Planet Apple.”

In his 2015 view the firm was “rapidly expanding its reach beyond traditional mobile devices and into wearable technology, the smart home, the connected automobile and elsewhere.” Apple has, in fact, done that and more. The problem is that it hasn’t really earned any money for its effort.

iPhone remains king of Apple pie

While the services market appears to get darker, Wall Street has greatly lightened up about the future of the iPhone. After a year-on-year fall in sales in 2016, a first for the device, investors are looking for a big bounce back this year.

There is an argument to be made in favor of services that suggests they don’t exist to make a profit themselves. Instead, they’re designed to make money for Apple Inc. by increasing demand for its smart phone.

Because the iPhone basically covers all of Apple’s profit, investors aren’t likely to protest investment in certain side projects in order to get the benefit of increased iPhone demand. One of the big things that the iPhone is able to offer is its own unique software experience. News, Music, and even health add to that feeling.

Perhaps then, as with Google services, Apple should be allowed to offer this sort of service without being expected to earn money directly. That is an easy sell with services like Apple Maps, but it becomes much more difficult to convince Wall Street that there is no money in health care.

Can healthcare be the future for Apple stock?

Healthcare, whether through mobile apps or something else, is likely to be a growing area of tech investment in the coming years. Apple is, already, one of the more established firms in the consumer-facing side of the industry.

That gives it a foothold that it could use to build a place for itself in the industry. The question is whether or not the Cupertino concern has the willpower or the know-how to make itself a profitable part of the healthcare world.

One dramatic way the firm could do that would be an acquisition. Back in June Citi group’s Garen Sarafian speculated that Apple Inc. could potentially acquire athenahealth, Inc

In the view of Mr. Sarafian, the move could be very beneficial as it would give the Cupertino firm access to a pre-built network of doctors to work with. Neither Tim Cook nor anyone from athenahealth have made any mention of a potential acquisition, however. As a result it’s likely better, for investors at least, to assume that there is little chance of such a deal taking place.

Moving forward with Apple care

It’s clear however that Apple is still thinking about the healthcare business. At the start of June the firm hired Dr. Sumbul Desai from Stanford University. It is working on improving its service, and there may be something big in the making.

But can Apple turn health-care into a money-maker? The answer for the time being appears to be no. It doesn’t seem to want to deal with the regulation nor the politics. It has made little effort to do anything other than sniff around the edges of the market.

Eric Jackson over at CNBC, in fact, thinks that Apple will need to give up its own culture in order to succeed in services. In his view, the firm’s obsession with privacy is hampering app store earnings and more. That seems like a dangerous path for the firm to travel, specifically if it wants to get to work in healthcare.

While the “Planet Apple” family of services certainly adds demand to the iPhone, and earnings to each share, it is possible that future services could do damage. If Apple were to change its privacy tack there is a large risk of negative news coverage that could depress demand.

That is, perhaps, one reason why Apple has been so slow to move forward with its services and healthcare businesses. The firm may be worried that it could poison its reputation by pulling too fast in the wrong direction. If internal voices sound like Mr. Jackson’s, now is likely a wise time to be conservative.

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