Apple's App Store drives Services revenue, but Barclays sees big growth in ads, pay
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Apple's (NASDAQ:AAPL) Services business, which some analysts believe may be worth as much as $1.5 trillion of the company's near $3T valuation, is largely driven by the App Store. However, investment firm Barclays said other pieces of the Services pie may boost future growth, including advertising and payments.
The group of analysts, led by Tim Long, estimate Apple (AAPL) will generate Services revenue of $83B in fiscal 2023 and $93B in fiscal 2024. While this may only account for mid-single digit growth, the analysts believe it accounts for 35% of the company's gross profit, making future growth that much more important.
The investment firm's analysts believe advertising will account for 29% of Apple's (AAPL) total services revenue this year, due largely to traffic acquisition costs and Apple's own advertising business.
While the revenue from traffic acquisition costs - which mostly comes from Google (GOOG) (GOOGL) - could see regulatory and commercial risks, the company's own ad business has "a lot of runway across its other businesses."
As such, the analysts forecast 35% growth for the advertising portion of its Services revenue over the next few years.
In March, Barclays analysts estimated advertising-related revenue is likely to be worth $7.5B in 2023, up from $5B in 2022, the majority of which is driven by App Store ads. Recent reports indicate that Apple (AAPL) could expand advertising into other apps, including Apple TV+ and Apple Maps.
Apple Pay, estimated to account for 3% of Services revenue, is also likely to be a strong grower - to the tune of 35% over the next few years - for Apple (AAPL) as it "dominates in mobile payments."
Apple's (AAPL) iCloud business has also performed admirably for the Tim Cook-led tech giant, as it is now believed to generate 13% of Apple's Services revenue.
"We have seen solid penetration of the iPhone installed base, so this business clearly benefits from the ecosystem," the analysts wrote.
Apple's (AAPL) growing AppleCare segment, the company's insurance and extended warranty program, is believed to account for 12% of Services revenue. The analysts pointed out that there has recently been a "decent increase" in attach rate for Apple Care, including much that comes directly from Apple's own stores.
Apple Music, which is thought to account for 11% of Services revenue, has allowed the company to continue to add subscribers at a "stable" rate. However, it competes with other similar offerings such as Spotify (SPOT), YouTube Music and Amazon (AMZN) Music, so it's believed to have "very low" gross margins and has not seen an increase as a percentage of the iPhone subscriber base.
Despite the strength in advertising and payments, the App Store, which is estimated to account for 31% of Services revenue this year, is likely to continue to deal with headwinds the analysts said. These include a weak macro economy, foreign exchange pressures, continued pressure from China on its gaming industry, as well as changes from Apple's identifier for advertisers and the potential loss of commission-related revenue from in-app purchases and subscriptions, of which Apple (AAPL) takes up to a 30% cut from.
One area where the analysts aren't so sure of its future? Apple TV+, which they believe generates only 2.5% of Apple's total services-related sales.
The streaming service, which has produced hits like Ted Lasso and Severance could see 30% revenue growth over the next few years as it raises prices. However, the company is still likely losing money on the venture, perhaps to the tune of $6B, leading the analysts to "struggle with how this business fits in."
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