Apple, known mostly for its iPhones, iPads, and Mac computers, is a step closer to morphing into a services company. And analysts have plenty to say about it.
The tech giant on Tuesday reported fiscal second quarter earnings that initially seemed disappointing. Apple’s revenue from iPhones fell 17% to $31 billion year-over-year while profits dropped 16% to $11.6 billion.
But investors who looked more deeply in the results found reasons for optimism. IPhone sales fell in January and February, but March was strong—signaling that they had turned a corner. And Apple’s services business, which includes revenue from the App Store, Apple Music, and iCloud, had $11.5 billion in sales, up 17% from $9.9 billion in the year-ago quarter.
Services now brings in more revenue than both the Mac and iPad divisions combined. That size, coupled with Apple CEO Tim Cook kicking off a call with investors on Tuesday by talking about services, made clear just how critical the division has become in Apple’s product mix.
Encouraged by the results, investors sent Apple’s shares up 4.9% on Wednesday to $210.52.
In notes to investors on Tuesday, several Apple analysts said they were impressed by the company’s performance. And although Apple’s biggest-selling device, the iPhone, is struggling, many of them were optimistic about stronger results overall for the company in the near future.
Here’s what they had to say:
J.P. Morgan Finds Positive Signs in China
J.P. Morgan analyst Samik Chatterjee said he expects Apple to grow revenue in the coming quarters. Chatterjee was especially pleased by Apple’s performance in China, where sales declined 22% year-over-year, but showed improvement over the 27% decline in the previous quarter. Price cuts and expanded trade-in programs in China that encourages customers to ditch old devices for new ones seemed to be lifting sales there, Chatterjee said.
J.P. Morgan’s 12-month price target on Apple’s shares, which are currently at $214.52, is $235.
eMarketer Looks to the iPhone
EMarketer analyst Yoram Wurmser voiced skepticism about Apple’s earnings the growth in Apple’s services business couldn’t offset the 17% year-over-year decline in iPhone revenue.
“The long-term growth of the company still depends directly and indirectly on iPhone sales,” said Wurmser, referring to the money the company collects from iPhone owners who subscribe to its services.
During his call with investors on Tuesday, Apple CEO Tim Cook said that he’s unconcerned about the iPhone’s declining revenue. In a sign of hope, he pointed out that iPhone sales declined more steeply early in the quarter than at the end, and that he and fellow executives “like the direction” the iPhone division is going.
Needham Talks Ecosystems
Needham analyst Laura Martin said that growth in Apple’s services division bolsters the “ecosystem” argument— that people who buy Apple devices are more likely to subscribe to services like Apple Music or iCloud. Because they’re using Apple’s services, those customers are more likely to buy more Apple hardware at some point.
The average Apple customer lives in that ecosystem for 10 years before considering alternatives, like Android or Samsung smartphones, Martin said. It’s something that Apple’s services business has already benefited from and will continue to do so over time.
“We believe the Apple ecosystem is approaching 950 million unique ‘subscribers,'” Martin said, referring to subscriber to the company’s services. Needham estimates that those subscribers own a total of 1.4 billion Apple devices.
Needham’s 12-month price target on Apple’s stock is $225.
Morgan Stanley Feels Good About the Next Quarter
Morgan Stanley analyst Katy Huberty expects Apple’s fiscal third quarter to be strong, noting that sales across iPhone and other key areas, like wearables, accelerated in March and remained robust in April. Huberty believes that trend, coupled with similarly momentum in services, could be enough to help Apple’s financial performance and push its shares higher in the coming weeks.
Morgan Stanley has a $240 12-month price target on Apple’s shares.
UBS Looks to Qualcomm
Earlier this month, Apple and Qualcomm settled their nearly two-year long patent dispute and signed a six-year deal for Qualcomm to supply Apple with chips for its devices. Most industry watchers say Apple signed the agreement to get access to Qualcomm’s 5G modems so that future iPhones can connect to ultra-fast 5G wireless networks.
In a note to investors on Tuesday, UBS analyst Timothy Arcuri called Apple’s Qualcomm deal “neutral” to the iPhone’s maker’s future performance. More importantly, Arcuri questioned how Apple’s iPhone sales could be impacted by adding a 5G modem in next year’s iPhones.
Arcuri said that 5G modems will be more expensive than the current 4G modems Apple uses. Unless Apple can increase iPhone prices enough to offset that higher cost, the company’s iPhone profit margins may shrink. But it’s not a problem today, Arcuri said, and for now, Apple’s iPhone division is pointing “in the right direction.”
UBS has a $235 12-month price target on Apple shares.