Hi, it's tech intern Stephen Pastis writing for you today.
Apple just achieved a major milestone, garnering 1 billion subscribers in its most profitable business—and investors are acting like the phones are bending again.
Apple's stock is down about 3% today, following the results of Apple's latest quarter. That's about $90 billion worth of market value wiped out.
What's behind this very costly disconnect?
iPhone sales fell compared to this time last year. A downward trend in iPhone sales like this hasn’t happened since 2016, and the company saw revenue decline for the third straight quarter.
It’s a sign of a slowing down in the U.S. for Apple’s bread-and-butter product: the iPhone. It’s a tough time for mobile phones, to be sure. While there are mixed reviews from investors, some point out that the next quarter will be the iPhone’s time to shine, and others point to the growth in emerging markets like India and China.
But the severe market reaction points to an identity crisis that could haunt Apple for some time yet.
Apple has been recasting itself as a services business for a while. It has continuously released new and updated subscription options providing things like cloud storage, music, and news. Don’t forget Apple invested enough money into Apple TV to nab an Academy Award for best picture, beating Netflix to the win. And Apple’s securing the rights to Major League Soccer and bringing Lionel Messi to a Florida soccer team are some of the biggest moves in sports and streaming right now.
Apple reported an all-time high in services revenue for the quarter, coming from the record-setting 1 billion subscribers to Apple services during June. And as Piper Sandler’s analyst Harsh Kumar told Fortune, services have a much higher profit margin than hardware devices. If Apple sees more subscribers, that’s more direct dollars to the bottom line, he said.
But if consumers stop buying as many Apple hardware devices, will the foundation for the services business crumble? That seems to be Wall Street’s current view. Apple executives have themselves contributed to this view: In the recent earnings call, they boasted about how customers who own more than one Apple device are typically more engaged in the Apple ecosystem and tend to spend more on the services front.
Apple may see services as the engine of its future financial growth, but for consumers and investors, Apple is still a hardware company.
Stephen Pastis
Data Sheet’s daily news section was written and curated by David Meyer.
