Apple Inc. (NASDAQ:AAPL) is inching closer to a major milestone. Never mind the release of the latest iPhone, for now. At a market capitalization of over $825 billion, AAPL stock only needs to increase about 21% before it becomes the world’s first trillion-dollar company.
Source: Beni Krausz via Unsplash
An iPhone refresh will no doubt give revenue a boost, along with potentially driving the share price higher. What else is driving AAPL forward?
New App Reality
More important than device sales is the smartphone’s adoption for augmented reality (AR) in games and applications. At the Apple Worldwide Developer Conference (WWDC), Apple introduced ARKit, a new framework that the company describes as “a new framework that allows you to easily create unparalleled augmented reality experiences.” This allows app makers to add AR support for iPhones and iPads.
In fiscal Q3, Apple set an all-time quarterly record of $7.3 billion in revenue in the services division. This is due mostly to the App Store which generated more than $28 billion in sales in 2017. If Apple apps are first to market on AR-support, consumers on other platforms will find a compelling reason to switch over to the Apple ecosystem.
One negative headwind worth mentioning is Apple’s decision to remove VPN apps from the App Store in China. This is a setback because this gave China-based Apple users ways to bypass state censorship controls. The move signals further restrictions Apple faces in the region. Not all apps are saleable. Any future apps that threaten China’s state laws face banning, too.
Apple Music streaming service contributed positively to the company’s Services revenue in Q3. Music, along with iCloud and other offerings, reached over 185 million users. This user base growth will lead to higher profit margins for Apple.
Subscriptions are historically a good way for companies to boost profitability. Adobe Systems Incorporated (NASDAQ:ADBE) reported better profits each passing quarter as its user base moved from software purchases to monthly subscriptions. Microsoft Corporation (NASDAQ:MSFT) successfully grew its subscriptions for its prized productivity suite, Office365. Apple is accomplishing the same feat through its music services and iCloud.
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At WWDC, Apple announced iOS 11, which will enable iPhones to better handle Apple Pay peer-to-peer payments. The reach keeps getting bigger. In May, the company launched Apple Pay in Italy.
The UAE, Denmark, Finland, and Sweden will all have Apple Pay available by the end of this year. On its Q3 earnings conference call, management said that Apple Pay accounts for around 90% of all NFC-based transactions globally. Its success is more pronounced outside of the U.S., where three out of four Apple Pay transactions happen.
Apple succeeded in reversing the drop in iPad sales. In the last quarter, it sold 11.4 million tablets, up 15% from last year. The company has a market share of 89% in the group of tablets priced at more than $200. Overall, the iPad has a 55% market share of the U.S. tablet market.
Recognizing the usability of the device in businesses, Apple expanded iPad adoption in enterprises. Wal-mart Stores Inc (NYSE:WMT) will deploy more than 19,000 iPads to its employees. The higher-end iPad Pro is winning customers like Medtronic PLC and Bank of America Corp (NYSE:BAC).
The education sector is another key area of growth for the iPad, with sales up 32% year-on-year.
Bottomline for AAPL Stock
While AAPL stock trading volumes will not doubt surge after Apple’s announcement for new products, it’s software and services that are the keys to the company’s future profit margins. At a forward P/E under 15, the stock has plenty of upside. When the company reaches a milestone $1 trillion market capitalization, this will be a non-event.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
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