Apple Stock: Investors Ignore This Risk, But They Shouldn’t

To address scrutiny in the US and abroad, Apple continues to offer concessions on its App Store policies. Is the market underestimating the risks to the investment thesis?
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Another development in Apple’s App Store saga has come to light. The Cupertino company has once again adjusted its App Store policy to benefit certain app developers around the world, following the results of an investigation by the Japan Fair Trade Commission.

Another chink has been added to Apple’s armor, the second in less than one week. However, it looks like Apple stock  (AAPL) - Get Apple Inc. (AAPL) Report investors brushed off the potential implications to the company’s highly profitable services business once again.

Should they be more concerned?

Figure 1: Apple Store in Shanghai, China.

Figure 1: Apple Store in Shanghai, China.

(Read more from the Apple Maven: Bear Attack: Could Apple Stock Really Drop 40%?)

What happened?

On September 1, the Cupertino company announced that it will allow so-called “reader apps” to link to an external website to set up and manage accounts, starting in 2022. These are businesses that provide previously purchased content or subscriptions and include the likes of Netflix  (NFLX) - Get Netflix, Inc. (NFLX) Report and The New York Times.

Despite the news that certainly looks negative at first glance, Apple stock did not flinch. In the first couple of days of September, AAPL climbed about 1.5%. It has also risen 3.5% since August 26, when Apple announced that US developers will be allowed to offer alternative payment options via e-mail.

Originally, Apple charged 30% commission on most digital transactions through its App Store, including subscriptions and in-app purchases – but not physical products. The high-margin business helped to grow Apple’s services to what it is now: a segment with $65 billion in annual revenues, about one-third of which generated by Apple’s app platform.

The Apple Maven’s take

Is the most recent news regarding the App Store policies a major headwind for Apple stock? On the surface and taken in isolation, I believe that it is not.

Simply allowing for external links to be placed in the App Store does not mean that users will transact outside the platform. Also, the new policy will apply only to certain apps – more importantly, not to the most lucrative gaming space that is estimated to drive 60% to 70% of all App Store fees.

However, this is yet another nudge in the wrong direction for Apple’s app business. While I continue to believe that Apple stock investors should not panic in the face of reduced App Store revenue opportunities, I suspect that some might be largely ignoring the risks at their own peril.

The rubber will meet the road in late October, when Apple reports fiscal Q4 earnings. Will the service segment experience lower growth rates? Will guidance for the first quarter be impacted by App Store-related headwinds? Keep this important topic of conversation in mind.

Twitter speaks

In response to broad-based scrutiny in the US and abroad over its app platform, Apple keeps adjusting App Store policies to favor developers. Are you convinced that this is a headwind to Apple stock?

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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)