AAPL Stock: Is This Report Bad News for Apple Inc.?

AAPL StockReport Reveals Something Unusual About Apple Inc.

A new report on Apple Inc. (NASDAQ:AAPL) reveals something unusual about one of its high-growth services. Holders of AAPL stock must take note.

Before I get to it, I must remind my readers that Apple is building its “iOS” ecosystem through services like “Apple Pay” and “Apple Music.” In fact, analysts at Goldman Sachs are now predicting that Apple might eventually become a services company.

It is true that the services segment makes up merely eight percent of its total revenue as of Apple’s latest quarter. However, it is also obvious that this segment now holds more relevance than Apple’s hardware segment, which is fast losing steam.

If you look at the latest quarter, it is this services segment that posted a stellar double-digit year-over-year revenue growth of 26%. In comparison, “iPhone” sales grew by a meager one percent, while the company’s “iPad” and “Mac” segments reported negative revenue growth.

Now, Apple Pay is the one service that is receiving the most traction. It is a person-to-merchant mobile payment service that allows Apple users to purchase products or services at designated points of sale (POS) without having to take out their wallets. Simply put: owners of an iPhone, iPod, or Apple Watch can pay electronically with their Apple devices.

The service was launched in 2014 and since then, billions of dollars have been transacted through this service in the U.S. Its success urged Apple to launch the service in Canada and Australia last year. The next markets on the list are China, Hong Kong, Spain, and Singapore.

In fact, CEO Tim Cook announced in the latest quarterly call that Apple Pay saw a robust 10% growth in the second half of 2015 compared to the first half of the same year.

However, the latest report from First Annapolis, a financial advisory firm, reveals some unusual stats on the Apple Pay service that might dim Tim Cook’s optimism. (Source: “Updated Consumer Perspectives on Apple Pay,” First Annapolis, February 11, 2016.)

The gist of the report is that the adoption of Apple Pay has slowed in the last half of 2015. According to the report, 20% of “iPhone 6” users used Apple Pay in the fall of 2015, down from 22% in the spring. Likewise, recognition of the service also fell during the same period. Less iPhone 6 users are familiar with Apple Pay now than before.

The report does account for a margin of error, but the stats must still raise two pertinent concerns for Apple:

The first is brand recognition.

It’s true that the proliferation of competitor services like “Android Pay” and “Samsung Pay” will help increase adoption of mobile payments in the consumer market. But the growing unfamiliarity of Apple Pay will allow rivals to expand into this niche before Apple can secure its market share.

The second is ease of use.

The high satisfaction rate but low adoption rate of Apple Pay can only mean one thing—that potential consumers are choosing their wallets over Apple Pay. This is either because there’s a dearth of physical points of sale that accept Apple Pay or consumers have reliability issues.

To achieve a better adoption rate, Apple must continue to build long-term partnerships with merchants, particularly local retail stores and restaurants.

The Bottom Line on AAPL Stock

This report hints at some valid concerns for Apple Pay, but at the same time, it delivers two positive takeaways: more than 80% user recognition and more than 90% user satisfaction indicate that this service is, nonetheless, a hit.

Two months ago, Apple made an announcement to launch its person-to-person (P2P) payment service to complement Apple Pay. This P2P service allows Apple users to electronically transfer payments to other users, competing with PayPal’s “Venmo” service and Square’s “Square Cash.”

If you’ve been paying attention, it’s clear that Apple is building a full-blown mobile segment for financial services that will supplement its ecosystem. This segment is already posting double-digit growth and is expected to grow into a promising source of revenue for the company.

Long story short: this service could turn out to be a game-changer for AAPL stock in the coming months, as Apple Pay expands into new markets.