A turnaround could be in store for Apple.
Apple (AAPL -1.92%) has had some issues recently, as evidenced by its most recent quarterly results. The company saw its total revenue fall 4% as iPhone sales sank 10%.
However, one bright spot for the company has been its service revenue, which includes its App Store and Apple TV. Service revenue rose 14% last quarter and that momentum appears to be continuing with one Wall Street analyst recently saying the company’s App Store revenue was tracking up double digits so far this quarter.
Let’s take a closer look at the analyst’s comments and what continued strength with its App Store could mean for Apple’s stock moving forward.
App Store momentum continues
Bank of America analyst Wamsi Mohan recently put out a note using data from market intelligence company Sensor Tower that showed through the first 66 days of the company’s fiscal third quarter, App Store revenue was up 11% to $5.4 billion. Growth in productivity apps led the way, with the segment seeing 36% year-over-year growth. Revenue from gaming, its largest app segment, was up 6%.
Importantly, Mohan noted that European Union data showed that revenue in the region has increased by 25% over the past 90 days, while downloads were up 3%. This is important information as the European Union (EU) forced Apple to open up its system to third-party app stores and browsers as part of its Digital Markets Act. Mohan noted so far there has been very little change in consumer behavior toward Apple’s App Store despite this new law.
This in and of itself is good news. However, if this behavior is indicative of consumers around the globe, especially in the U.S., it would also remove a potential risk that Apple is facing. The possibility of the U.S. forcing Apple to make similar changes has been a risk, but if consumers aren’t going to change their habits even when other app stores and browsers are allowed on Apple’s platform, then the risk becomes greatly diminished.
The Sensor Tower data also revealed that May was a stronger month than April, with May App Store revenue up 12%, including 10% growth in China. China was led by a 20% jump in entertainment app revenue.
Speaking of China, in a separate report, Citibank analyst Atif Malik recently released a note saying that third-party data show iPhone demand in China was stabilizing, which correlates with its own Asia supply chain checks. Malik said that sale discounts in China ahead of the country’s 618 shopping holiday have helped boost sales. This followed news that iPhone sales in China surged 52% in April.
Both the App Store and China data points are important for Apple. App Store and service revenue have been a bright spot for the company and this segment comes with a much higher gross margin than its product sales. In the first quarter, service gross margin was 74.6%, while product gross margin was 36.6%. That means service revenue is dropping to the bottom line as profits much more than product sales. This helped Apple report an increase in profits through the first half of its fiscal year even though its revenue ticked down slightly.
Meanwhile, China has been a tough market for Apple recently, so seeing stabilization is a good sign.
Image source: Getty Images.
Time to buy the stock?
Apple hit a bit of a rough patch recently, but there appear to be solid signs that the worst is now behind the company. Meanwhile, the company could be in store for a hardware upgrade cycle in the coming years as consumers look to upgrade their smartphones and computers to run the latest artificial intelligence (AI) technology. Apple hasn’t been at the forefront of AI, but it tends not to rush into new technology, instead preferring to get it right first. With its integrated ecosystem, I would expect when the company introduces more AI intensive features, they will run smoothly.
Trading at a 30 times forward price-to-earnings (P/E) multiple, Apple stock is not in the bargain bin given where its growth has recently been.
AAPL PE Ratio (Forward) data by YCharts
With App Store risks diminishing, China stabilizing, and a potential boost from AI ahead of it, now looks like a good time to get into Apple’s stock, which has been a laggard compared to many other large-cap tech stocks over the past year. I would expect growth to start to pick up next fiscal year and for the stock to be a solid winner over the long run.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Bank of America. The Motley Fool has a disclosure policy.