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Apple Stock: Investors Brush Off App Store Concerns

Apple gave in to developers on key App Store policies, but Apple stock did not flinch. Here is what investors should know about this important topic.

Friday, August 27 could have been a tough day for Apple stock  (AAPL) - Get Apple Inc. (AAPL) Report. The Cupertino company announced an agreement with developers in the US that effectively limits Apple’s revenue firepower within the App Store – Apple’s marketplace that serves 1 billion users worldwide. Now, certain developers will be allowed to monetize their apps outside Apple’s ecosystem, given some restrictions.

Despite the news, Apple shares climbed 0.7%, albeit less so than the tech-rich Nasdaq index, to end the Friday trading session near all-time high. Could the market be too complacent about the risks posed by the recent lawsuit settlement, which could reshape the App Store’s revenue model?

AppStore Logo

Figure 1: Apple's App Store.

(Read more from the Apple Maven: Apple Stock: How It Could Be A Great Inflation Play)

App Store: key piece of the puzzle

Because Apple is better known as the iPhone maker, some may disregard or underestimate the importance of the App Store within the company’s ecosystem. I calculate that the app business produces about one-third of Apple’s services revenues, which in turn represent 20% of total sales.

What is probably most relevant is the likely impact of the App Store on the company’s earnings. First, service margins are substantially higher than product margins: 66% vs. 31% in fiscal 2020. Second, due to its massive scale, it is probable that the App Store’s margins are even higher than this.

It is not unreasonable to assume that the bulk of App Store revenues trickle straight down to pretax earnings. Therefore, a meaningful reduction in commissions collected from developers could translate into a noticeable change in EPS. This is why I have previously stated the following:

“Any change to the App Store’s business model or monetization policies that arise from this fight [with developers] could be a bearish development for Apple’s stock.”

Panic? Not so fast

Despite the likely hit to Apple’s future P&L results that arises from this issue, I believe that Apple stock investors should not panic. First, through a display of good faith, Apple’s recent move helps to deflate the accusations of monopoly that have been haunting the Cupertino company lately.

Second, the changes in monetization policy may not necessarily lead to a change in consumption behavior. Developers will now be allowed to inform users of alternative payment methods by email, but it does not mean that the majority (or even a large portion) of consumers will choose to leave the App Store ecosystem to transact with developers directly.

Clearly, the impact of this policy change is hard to quantify today, given the many moving pieces. A clearer answer might only come at quarter-end points, when Apple reports on the performance of its services segment. For now, I believe Apple investors should stay the course, while keeping tabs on this hot topic of conversation.

Twitter speaks

Apple has settled an App Store-related class action lawsuit with developers by agreeing to less favorable terms. Does this worry you?

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(Disclaimers: this is not investment advice. 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)