Apple's Price Hikes Drive Revenue Growth for Services Segment
Apple's valuation has seen a significant increase in the past five years, largely due to the strong performance of its Services segment. This segment's revenue share has grown from 15% to 22%, resulting in improved gross margins. To further boost the growth of its Services segment, Apple has recently implemented substantial price increases for various services such as TV+, Music, News, and Apple Arcade since the end of FY2022.
According to analyst Toni Sacconaghi from Bernstein, these price hikes have played a crucial role in driving services revenue growth, contributing an additional $1 billion to gross and operating profits. Sacconaghi projects that continued price increases will add another 140 basis points to services revenue growth in FY24, increasing gross and operating profits by $1.2 billion.
Sacconaghi also highlights that Apple's 25% price increase for iCloud services in certain countries indicates the potential revenue growth that can be achieved with a global rollout of these price hikes. However, despite these strategies, the analyst notes a slowdown in services growth, estimating an 11% revenue growth for FY24, which will mark the third consecutive year below 15%. This is in contrast to the compound annual growth rate (CAGR) of 22% for services over the past 10 years. Sacconaghi predicts that Apple may maintain low double-digit growth rates in services over the next 3 to 5 years.
According to Sacconaghi, the future growth of Apple's services will likely depend on the performance of Advertising/Google payments and the App Store, which account for 60% of Services revenues. Additionally, Apple's ability to introduce new service offerings will also play a crucial role. Based on these analyses, Sacconaghi takes a neutral stance on the near-term risk-reward balance for Apple's stock, giving it a Market-Perform rating with a $195 price target, indicating a potential 7% growth from current levels.
Analyst consensus leans towards a Moderate Buy rating for Apple stock, with 17 buy ratings, 7 neutral stances, and 1 sell. The average price target among these analysts suggests a 13% upside at $206.68.
Analyst comment
Positive news: Apple’s valuation has notably increased over the past five years, largely due to the growing strength of its Services segment, which has seen its revenue share grow from 15% to 22%, contributing to an improvement in gross margins. Price increases for several services have driven revenue growth and are projected to enhance profits. The consensus among analysts leans towards a Moderate Buy rating for Apple stock, with a 13% upside potential.
As an analyst, I anticipate that the market will react positively to Apple’s continued growth in its Services segment and the projected profit enhancements from price increases. The consensus among analysts suggests a positive outlook for Apple stock, with a potential 13% upside. However, the slowdown in services growth and the need for new service offerings may pose challenges and should be closely monitored.
