Apple's slowing App Store growth could lead to weak Services revenue, MS says
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Apple (NASDAQ:AAPL) may have seen slowing App Store growth in May, which investment firm Morgan Stanley pointed out could mean "downside risk" for Services revenue this quarter.
Analyst Katy Huberty, who has an overweight rating on Apple (AAPL) shares and a per-share price target of $195, noted that third-party data provided by Sensor Tower, showed just 4% year-over-year growth in May, despite an easier comparison.
Huberty pointed out that through the end of May, App Store net revenue is up 6% year-over-year, but comparisons get "3 points tougher in June," which suggests there is downside risk to the firm's estimate of 15% year-over-year growth for the App Store net revenue this quarter.
Apple (AAPL) shares fell nearly 2% to $148.29 in premarket trading on Friday.
On Thursday, investment firm Evercore also expressed concern for near-term App Store revenue, citing the data.
It's a possibility that the weakness in the App Store could lead to broader weakness in Apple's (AAPL) Services revenue, as it accounts for a significant portion of the segment.
Huberty estimates it could be worth as much as $560M in downside for the current App Store forecast, which would knock 3.2% off Services revenue forecast of $20.09 billion, up 14.9% year-over-year.
"While we believe Apple user spending is more resilient at all stages of the economic cycle, which positions Apple better than other consumer hardware peers, a deceleration in App Store growth likely points to fading consumer spending on goods/services that accelerated during the pandemic," Huberty added.
Nonetheless, Huberty pointed out that the firm is still bullish longer-term on the App Store and broader Services revenue going forward, but it could be an issue in the near-term, specifically for the June quarter.
"With the health of the consumer and the potential shifting nature of consumer spending patterns a key debate entering the summer months, an acceleration in App Store growth could help to dispel the bear concern of a more permanent App Store slowdown," Huberty explained.
Last month, it was reported that Apple (AAPL) may be looking to restructure its Services business to boost its advertising and streaming businesses.