Analysis of Apple’s AppStore Business and More

Earlier this week, Apple (Nasdaq: AAPL) announced another blowout quarter. While the pandemic has curtailed sales in physical stores, Apple’s continuous product upgrades has helped it accelerate its sales significantly.

Apple’s Financials

Apple’s first quarter revenues grew 21% to $111.4 billion, significantly ahead of the market’s forecast of $103.28 billion. EPS grew 35% to $1.68, surpassing the Street’s forecast of $1.41.

By segment, iPhone revenues grew 17% to $65.60 billion. Mac sales grew 21% to $8.68 billion and iPad sales grew 41% to $8.44 billion. Revenues from Other Products that includes AirPods, Beats, and the Apple Watch grew 29% to $13 billion. The services segment revenues grew 24% to $15.76 billion.  

Despite the pandemic’s lockdown conditions, Apple has benefited from increased PC and gadget sales. Users now working from home are looking to upgrade the devices they use. Its new iPhone models released in October this year are the first to include 5G and have seen significant adoption by consumers. Apple’s total install base for iPhones is now more than 1 billion, compared with the previous reported base of 900 million. The total active install base for all Apple products is 1.65 billion. Products like the Apple Watch and headphones such as AirPods and Beats were expected to see a reduction in sales as people were spending less time commuting and traveling, but contrary to expectations sales in the segment continue to soar.

Apple has not provided any forecast since the start of the pandemic. The market estimates revenues of $76.09 billion and an EPS of $0.94 for the second quarter and revenues of $321.89 billion and an EPS of $4.06 for the year.

Apple’s Product Upgrades

During the quarter, Apple announced its most powerful chip M1, which is specifically built for Mac systems. As a system-on-chip (SoC) offering, M1 combines several technologies and boasts of a unified memory architecture that improves both performance and efficiency. It is the first personal computer chip that has been built using the 5-nanometer process technology and is packed with 16 billion transistors – the most Apple has ever put into a chip. It features the world’s fastest CPU core in low-power silicon, the best CPU performance per watt, the fastest integrated graphics in a personal computer, and machine learning performance with the Apple Neural Engine.

The chip helps deliver up to 3.5x faster CPU performance, up to 6x faster GPU performance, and up to 15x faster machine learning, while enabling battery life up to 2x longer than previous-generation Macs.

Traditionally, Macs and PCs have used multiple chips for the CPU, I/O, security, and more. But with M1, these technologies have been integrated into a single offering, thus allowing Apple to deliver integration for greater performance and power efficiency.

Besides product upgrades, Apple is also enhancing its service offerings. Recently Apple also unveiled its latest audio walking experience on Apple Watch for its Fitness+ subscribers, Time to Walk. The service is geared on helping people increase their exercise levels as it encourages users to walk often and collect the benefits from it. Each episode of the program is original content and features influential and interesting people who share thoughtful and meaningful stories, photos, and music.

To adapt to the virtual model of learning, shopping, and even celebrating, Apple now has a set of curated apps, news, music, podcasts, TV shows, movies, that are helping people stay entertained, informed, connected, and fit. Apps like ShareTheMeal, FaceTime, and Wakeout! are inspiring people to give back, stay in touch with loved ones, and take care of themselves. There was a significant slew of original content on Apple TV including the TV series, Ted Lasso, a Tom Hanks movie, Greyhound, and Apple Music content including Dance Monkey.

Apple’s Service Monetization

The increased adoption of iOS devices is also helping accelerate the service monetization for Apple’s offerings. During the quarter, active device installed base growth grew to 10% from 7% a year ago. Apple’s service monetization during the quarter also grew an impressive 30% with service revenue per device growing to almost $20. In other impressive metrics, Apple’s paid subscription base improved 30% to cross 620 million subscribers. Apple had initially targeted a paid subscriber base of 600 million by the end of 2020.

The growth in Apple’s service offerings is also being driven by its developer ecosystem. In 2019, Apple’s App Store ecosystem was supporting $519 billion in billings and sales globally. According to a study conducted by independent economists at Analysis Group, the highest value categories within this ecosystem were mobile commerce (m-commerce) apps, digital goods and services apps, and in-app advertising. Apple only receives a commission from the billings associated with digital goods and services and more than 85% of this billing actually accrues solely to third-party developers and businesses of all sizes. The App Store was launched back in 2008 and has become the world’s safest and most vibrant app marketplace. It has over 2 million apps on the store and is visited by half a billion people each week across 175 countries.

Its stock is trading at $137.09 with a market capitalization of $2.31 trillion. It touched a 52-week high of $145.09 earlier this week. The stock was trading at a 52-week low of $53.15 in March last year.

Disclosure: All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article. I am an investor in this company.

Photo Credit: Jan Vašek from Pixabay