Apple Earnings Preview: Can Services Double Again?

Apple’s services segment had a strong fiscal 2020, and the holiday quarter is unlikely to be any different. Here are the two key reasons why the Apple Maven believes this to be the case.
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Ahead of January 27, the Apple Maven continues to preview Apple’s fiscal first quarter earnings day. Don’t forget that our channel will cover the event via Live Blog, as usual, starting at 4 p.m. EST on the last Wednesday of the month – mark your calendars!

So far, I have peeked at the iPhone, expecting it to be “the king” of the holiday period. The Mac will probably not fall too far behind, and will likely deliver the one-two punch that Apple needs to beat what I consider conservative estimates.

Today, I turn the focus of attention to services. This important segment had a strong fiscal 2020, when revenues increased 16% (see graph below), driven by favorable stay-at-home trends.

Will the segment impress at the start of fiscal 2021? And looking forward, can service revenues double once again, as they did between 2016 and last year?

FQ2020 Rev Chart

First test for Apple One

I find it very probable that Apple’s services will have a good quarter. Two key factors support my optimism: the lingering pandemic and the Apple One bundle.

During a year of lockdown and important global events, consumers have been turning to the internet and their mobile devices for entertainment and information. Services like the App Store, Apple Music, Apple TV+ and News+ stand to benefit.

This could be one of the last quarters of strong service demand, before the vaccination efforts across the globe hopefully put an end to the global health crisis in 2021. Luckily for Apple, service revenues tend to be “sticky”, and it is unlikely that the segment will experience much of a decline going forward.

And then, there’s Apple One. The Cupertino company announced the services bundles in September, which were eventually made available for purchase in late October. Back then, I called Apple One “the most important development for investors” coming out of the September product refresh event.

This will be the first quarter in which the success of Apple One will be tested. I suspect that the results will be satisfactory, to say the least.

The bundles may be Apple’s solution to soft demand for some of its less popular and recently launched services., which include News+, Arcade and Fitness+. This would be in line with my original take on Apple One:

“Apple’s One service bundle is all about nudging users to not only sign up for services that most want (Music, iCloud), but also for those that most people rarely think about (News+, Arcade). In my view, this could be the solution to the lack of traction problem seen in parts of Apple’s services offerings.”

Looking beyond the quarter

The 2020 holiday quarter results will certainly be important. However, I am even more interested in the segment’s revenue growth path over the next few years.

In the second half of the 2010s, services played a crucial role in boosting Apple’s financial performance. Segment revenues doubled in less than five years, at an annual pace of about 16%. I wonder if the feat can be repeated going forward.

One of the ways that this could happen is through the introduction of new services that open up more TAM, or total addressable market potential. The rumor mill has already started to churn, as analysts expect Apple to unveil new services like Podcasts+, Mail+, and Stocks+ in the future.

It will be interesting to watch the evolution of Apple’s services in the next few years.

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(Disclaimers: the author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)