RBC: Services Revenue May Not Save Apple

Global investment firm RBC Capital Markets sent out a note on Sunday (Jan. 13) saying that Apple’s services revenue growth has slowed to 18 percent year-over-year, when it was expected to be at about 27 percent.

CNBC reported that services, which Apple frequently mentions as a bright spot for revenue and growth, is not doing the business it should be. RBC made a list of the reasons for the drop in revenue.

“We think investors are better off remaining positive here, given attractive valuation and high probability for services to re-accelerate later in 2019 via new offerings,” RBC said. However, the firm added that the stock is undervalued when taking into consideration that it has about $126 billion in net cash, which equals $185 per share.

On Monday (Jan. 14), Apple’s stock dropped about 1.3 percent. Apple has hinted that it will be releasing new products this year. CEO Tim Cook told Jim Cramer in an interview that “you will see us announce new services this year. There will more things coming.”

Another factor could be a lack of AppleCare buyers, RBC said. Not as many people are upgrading Apple products as fast as they usually do, and there isn’t a lot of ability for someone to add onto a warranty. Google traffic acquisition cost payments could also be a factor – the payments allow Google to be the default search engine on Apple products.

Finally, some developers, like Netflix, are going around what some call the “Apple tax” in the App Store. Apple charges a 30 percent cut on revenue for its apps. Developers are now actively avoiding the App Store, cutting into revenues.

On Friday (Jan. 11) it was reported that Cook said sales of Apple wearables, like the Apple Watch and AirPods, have blown past historic iPod sales, when the little music player was at its peak.

“On a trailing basis … the revenue for wearables is already 50 percent more than iPod was at its peak,” Cook said. “I think everybody would say it was an incredibly important product for Apple, full of innovation and probably the trigger for the company getting on a very different trajectory and into other markets.”