Apple is a $230 billion underdog.
Leading up to the company’s second-quarter earnings announcement May 1, pundits worried about reports of declining iPhone sales, just as they did prior to Apple’s earnings release in November 2017. In fact, this appears to now be a pattern leading up to many Apple announcements. And once again, Apple shrugged off the doubters.
The company reported quarterly earnings and revenue that beat analysts’ expectations — $61.1 billion for revenue (versus $60.82 billion expected) and earnings per share of $2.73 (versus $2.67 expected). The company’s stock rose after hours. And yet, here’s the kicker: iPhone sales were actually softer than expected.
So why did investors reward Apple?
One word: services. Apple’s services revenues amounted to $9.19 billion, above the $8.39 billion predicted. Although services revenues are dwarfed by product sales, Apple’s burgeoning services business represents a remarkable growth story flying under the radar of many observers.
Services encompass categories such as App Store, Apple Care, Apple Pay, iTunes, and cloud services. Services is where Apple has been steadily reinventing itself as a healthcare brand by providing wellness management tracking capabilities embedded in the Apple Watch. In addition, services is the home of Apple Music, which has challenged Spotify’s lead in just a few remarkable years.
Apple Creates a Healthcare Super Platform
Apple’s aspirations in healthcare are especially noteworthy. If Amazon is creating a super platform based on Alexa and Amazon Web Services, then the same could be said for what Apple is doing in healthcare. Apple is creating a data platform for wellness care, which encompasses the Apple Watch and software that physicians can use to develop services such as heart monitoring. For Apple to succeed, the company needs a network of physicians and hospitals to cooperate by incorporating the Apple Watch as a healthcare monitoring device and by sharing patient data. So far, Apple is succeeding. It’s a popular brand among physicians, and Apple is getting the cooperation of prestigious medical centers such as Cleveland Clinic to participate in Apple’s wellness programs.
It’s going to take some time, but healthcare represents an important area of growth for Apple as it expands its services.
An Augmented Reality Future
The growth in services is crucial for another reason: services will help Apple develop next-generation experiences built on augmented reality. As we and many other industry watchers have discussed, Apple is very clear about its aim to dominate augmented reality. Tim Cook views AR as the technology that could change the way we work and live in far more far-reaching ways than virtual reality (VR) ever could. Apple has been delivering on its AR vision by accelerating the uptake of AR with ARKit, a toolset for developers to create AR products with Apple as a platform. In addition, a new rumor is circulating that Apple is developing a headset that supports AR and VR (although it should be noted that rumors about Apple rolling out AR smart glasses have been circulating for some time). For the near term, the biggest story about Apple’s future with AR lies in the development and uptake of ARKit. As CNBC noted in its coverage of Apple’s earnings, software such as ARKit is a factor contributing to Apple’s services growth.
Eyes on China
It’s also noteworthy that Apple achieved 20 percent growth in Greater China and Japan. In China, sales of the iPhone X have actually increased, bucking sales trends elsewhere. In addition, Apple Pay is slowly expanding into China, and its adoption in China was credited as a factor contributing to Apple’s growth in the world’s largest retail market.
It is highly unlikely that Apple Pay will challenge the dominance of apps such as Alipay – in fact, Apple is hedging its bets by providing Siri support for Alipay – but for now, Apple is accepting growth largely through hardware with some adoption of Apple Pay making a contribution. Watch closely Apple’s progress here. If any Western brand can provide a payment alternative to a market dominated by Baidu, Alibaba, and Tencent, Apple will be that brand.
Among the FAANG companies (Facebook, Apple, Amazon, Netflix and Alphabet’s Google), Apple probably comes closest to being a classic brand – and often perceived as an uncool one since the passing of Steve Jobs. But Apple remains one of the world’s most admired companies, and one that is reinventing itself at its own pace.