Why Apple's services growth momentum is set to continue

August 07, 2018 11:41
Services business has outpaced overall revenue growth at Apple, emerging as the main growth driver amid slowing iPhone sales. Photo: Reuters

Apple's stellar quarterly earnings report last week again highlighted the fact that services have become the key revenue growth engine. The US tech giant, it is becoming increasingly clear, has successfully turned itself into a software firm.

Apple's service revenue jumped nearly 40 percent in its fiscal third quarter to June, while overall revenue was up 17 percent.

The service revenue covers items such as traffic acquisition cost other firms pay to Apple, and other services like Apple Pay.

Using the phone to make payment takes nothing more than a few seconds, much faster than using credit cards. Such convenience is going to attract more users of payment apps like Apple Pay over time.

Online shoppers' reluctance to reveal credit card information to vendor sites may also stimulate usage of payment apps.

Compared to other mobile payment platforms, Apple offers an added advantage — greater security. Unlike most mobile payment platforms where the smartphone maker and the payment apps are two companies, Apple’s iPhone and Apple Pay lets users pay with their phones while revealing information to just one company.

Mobile payment is likely to show exponential growth, and it won't be surprisingly to see Apple Pay-related income achieve a faster growth rate than iPhone sales in years to come.

Another factor that may continue to power Apple's stock price gain is share buyback.

Earnings per share soared 40 percent thanks in the June quarter, exceeding that of absolute earnings.

That is because the iPhone maker had repurchased nearly one quarter of outstanding stock since 2012.

Apple's market value is currently around US$1 trillion, and operating cash inflow amounts to about US$80 billion a year. If the company uses all these funds to repurchase its shares, it would only take 12 years to buy back all shares.

Going forward, share buyback will continue to have a significant impact on Apple's per-share earnings and stock price performance.

This article appeared in the Hong Kong Economic Journal on Aug 6

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal