As the iPhone Goes, So Goes Services
Writing for Seeking Alpha, Michael Wiggins De Oliveira expressed his sentiment that Apple’s services business doesn’t get enough respect by investors.
I have felt for some time and continue to believe so now that Apple’s Services opportunity is underappreciated by investors. For a long time, Apple was predominantly a consumer facing product company – with product-like profitability. Regardless of how powerful Apple was at squeezing its supply chain, combined with its economy of scale, it was still, at its core, a product company. However, recently, Apple signaled to the market that it wished to diversify its revenues and increase its exposure to its Service business line- and its associated asset-light profitability and strong accompanying margins. –Michael Wiggins De Oliveira, Seeking Alpha
I’ve heard this sentiment expressed from various other places so Wiggins De Oliveira is not alone in this view. However, Apple’s services are more complicated than they seem. Here is my problem with them. Apple services aren’t a true stand-alone business. I agree with Apple CFO Luca Maestri that services are accretive to Apple’s margins but services revenue is directly dependent on hardware sales. If hardware sales go down, so does services revenue. If hardware sales were to collapse, the services revenue would eventually wither and die.
When I think of a stand-alone services business, I think of something along the lines of HP or IBM who forked their business into a product side and a services side. The services were able to exist independent of the products in both of those cases. HP and IBM either jettisoned or divorced hardware from services but the services group continued to chug along. This would not be the case for Apple. If everyone switched to Android who would buy their services?
Wiggins De Oliveira correctly states that the services business doesn’t get enough respect. That’s because most investors fall more in line with the way I see Apple’s services. My view is that they’re really a dependent offshoot of the hardware business. As the iPhone goes, so goes services.
What would change my view would be a concerted effort by Apple to create a services business that would be popular by non-iPhone users. A business that would not fluctuate with hardware sales. And perhaps they are doing exactly that with their rumored push into original video content. Although, it’s way too early to speculate on what Apple may be planning in this area.
Now available in iBooks —> The Tesla Bubble
I’ve heard this sentiment expressed from various other places so Wiggins De Oliveira is not alone in this view. However, Apple’s services are more complicated than they seem. Here is my problem with them. Apple services aren’t a true stand-alone business. I agree with Apple CFO Luca Maestri that services are accretive to Apple’s margins but services revenue is directly dependent on hardware sales. If hardware sales go down, so does services revenue. If hardware sales were to collapse, the services revenue would eventually wither and die.
When I think of a stand-alone services business, I think of something along the lines of HP or IBM who forked their business into a product side and a services side. The services were able to exist independent of the products in both of those cases. HP and IBM either jettisoned or divorced hardware from services but the services group continued to chug along. This would not be the case for Apple. If everyone switched to Android who would buy their services?
Wiggins De Oliveira correctly states that the services business doesn’t get enough respect. That’s because most investors fall more in line with the way I see Apple’s services. My view is that they’re really a dependent offshoot of the hardware business. As the iPhone goes, so goes services.
What would change my view would be a concerted effort by Apple to create a services business that would be popular by non-iPhone users. A business that would not fluctuate with hardware sales. And perhaps they are doing exactly that with their rumored push into original video content. Although, it’s way too early to speculate on what Apple may be planning in this area.
Now available in iBooks —> The Tesla Bubble
RSS Feed