Lately, many users of Apple Inc.’s (NASDAQ:AAPL) products have been playing “Pokémon Go,” an augmented reality (AR) mobile app game. For Apple stock investors, though, there is something else that deserves their attention—AAPL stock’s lackluster performance.
Ever since “iPhone” sales began to show weakness last summer, Apple stock started losing its appeal. Most recently, iPhone unit shipments declined 16% year-over-year. Since iPhone sales make up nearly 65% of the company’s revenue, it shouldn’t really be a surprise that AAPL stock is deep in the doldrums.
The iPhone maker is going to report earnings next week. Will it give Apple stock a chance to make a comeback?
It’s possible. But this time, the thing that matters most for AAPL stock might not be iPhone sales.
You see, one of the explanations for the decline in iPhone sales last quarter was that people were waiting for the new model—the “iPhone 7”—to come out in September. It’s hard to determine how much this iPhone 7 anticipation affected last quarter’s sales, but it’s safe to assume that this consumer mentality exists. Now, we are even closer to the iPhone 7 launch, so consumers who want the latest iPhone will have even more incentive to wait just a couple more months.
If iPhone sales—the biggest revenue contributor to AAPL stock—won’t rebound, what else could cheer up Apple stock investors this time?
Well, there is one segment—other than the iPhone, “iPad,” and “Mac”—that still brought in $6.0 billion in revenue last quarter and that’s services.
When you buy a device from Apple, it’s not just a one-time transaction. When you activate the device, you become a member of Apple’s ecosystem. With booming device sales in the past several years, Apple’s ecosystem has expanded tremendously. Earlier this year, the company announced that its active installed base has surpassed one billion. (Source: “Q1 16 Earnings Supplemental Material,” Apple Inc., January 26, 2016.)
What this means for Apple is a huge monetizing opportunity. When people download apps from Apple’s “App Store” or make purchases using “Apple Pay,” Apple earns revenue. There’s no need for a product update cycle like with hardware devices and a lot of that revenue could be recurring.
The segment is already showing strong signs of growth. In both the first and second quarter of the company’s fiscal 2016, Apple’s services revenue enjoyed year-over-year growth of more than 20%. (Source: “Q2 2016 Unaudited Summary Data,” Apple Inc., April 26, 2016.)
The latest catalyst for Apple’s services segment is—and I’m not joking—Pokémon Go.
Here’s how it works…
First, Apple charges a fee to host apps on its App Store. Pokémon Go rose to the top of the App Store on the day it was released. Within three days of its release, Pokémon Go attracted more users than Twitter. (Source: “Pokemon Go is Now the Biggest Mobile Game in U.S. History,” NBC News, July 13, 2016.)
Then, when users are using the app, Apple can keep making money from in-app purchases. When users buy “lucky eggs,” “lures,” and “Pokéballs” within the game, Apple keeps a portion of that revenue.
Note that what Pokémon Go brings in is no small amount. According to data from Slice Intelligence, Pokémon Go’s in-game sales as of July 10 accounted for “nearly 47% of the revenue for the entire mobile gaming market.” (Source: “Poke Power: Pokemon Go Has More In-Game Buyers Than the Rest of the Mobile Gaming Market,” Slice Intelligence, July 15, 2016.)
Of course, Pokémon Go was released after the end of Apple’s fiscal third quarter, so its contribution to Apple’s services revenue won’t be reflected in next week’s earnings report. However, if Apple can keep the 20%+ growth rate of the segment going without help from Pokémon Go, it should be a welcome sign for investors.
The Bottom Line on Pokémon Go
Internet companies are the hottest commodities on the stock market today. Many investors made triple-digit gains on some of the big Internet names over the past few years.
Apple stock doesn’t look that appealing because the company is known as a hardware-maker. However, because of the enormous popularity of its products, Apple has built a giant ecosystem for increasing revenue. If the company can continue to improve on the monetization of its one-billion-plus userbase, it could be the next big thing for Apple stock.