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Can Continued Services Momentum Aid Apple (AAPL) Q1 Earnings?

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Zacks Equity Research
·4 min read
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Apple's AAPL first-quarter fiscal 2021 results are expected to have benefited from continued momentum in the Services business. The company is set to report on Jan 27.

The segment, which includes revenues from the App Store, Apple Music, iCloud, Apple Arcade, Apple TV+, Apple News+ and Apple Card, accounted for 22.5% of sales in fourth-quarter fiscal 2020.

Apple currently has more than 585 million paid subscribers across its Services portfolio. The App Store continues to draw the attention of prominent developers from around the world, helping the company offer appealing new apps that drive App Store traffic, thereby expanding subscriber base.

The iPhone maker is expected to have hit its target of 600 million paid subscribers by the end of 2020 on solid demand for games. Apple announced that App Store users spent $1.8 billion on digital goods and services over the week between Christmas Eve and New Year’s Eve, driven largely by solid spending on games.

Moreover, strong demand for video conferencing app Zoom as well as Disney’s DIS streaming service Disney+ is expected to have boosted App Store sales.

Apple Inc. Revenue (TTM)

Apple Inc. Revenue (TTM)
Apple Inc. Revenue (TTM)

Apple Inc. revenue-ttm | Apple Inc. Quote

The Zacks Consensus Estimate for Services currently stands at $14.78 billion, indicating 16.2% growth from the year-ago quarter’s reported figure.

Click here to know how Apple’s overall first-quarter results are likely to be.

Apple Music’s New Features Aided User Base Growth

Markedly, availability of features like Listen Now, a new Search option, personal radio stations and Autoplay is expected to have helped Apple Music gain new subscribers in the reported quarter. The service currently offers more than 70 million songs.

Additionally, Apple’s endeavor to broaden its ecosystem through partnerships with Amazon AMZN is a positive for the Services segment. Apple Music’s availability on Amazon Echo devices and Fire TV as well as on Google Nest Audio and Nest Mini is helping it expand its footprint and compete better with Spotify SPOT and YouTube Music.

Apple TV+ Lags in Market Share

Apple TV+ has been lauded for its content although the service has failed to gain significant market share.

Per research from JustWatch cited by 9TO5 Mac, Apple TV+ had only 3% of market share in the fourth quarter of 2020 in the United States compared with streamers like Netflix, Amazon’s Prime Video service and Disney’s Hulu who captured 31%, 22% and 14% of the market, respectively.

Moreover, new entrants such as Peacock, HBO Max, and Disney+, which were launched after Apple TV+, surpassed the iPhone maker with 6%, 9% and 13% of market share, respectively.

The gap can be attributed to coronavirus-led production delays and postponement of new original shows and movies.

Apple’s Non-iPhone Portfolio to Boost Revenues

Apple’s non-iPhone portfolio that comprises Mac, iPad and Wearables is expected to have aided top-line growth in the fiscal first quarter.

During the to-be-reported quarter, Apple launched its new MacBook Air laptop, a new 13-inch MacBook Pro laptop and Mac Mini desktop computer, all powered by the Arm-based M1 chip.

Markedly, lockdown measures to contain the spread of coronavirus have been stoking demand for PCs. PC sales were up 10.7% year over year to 79.4 million units during the December-end quarter, per Gartner’s preliminary estimates. IDC puts PC shipment year-over-year growth at 26.1% to 91.6 million units.

Both market research firms placed Apple in the fourth position, while Lenovo ranked #1. Per Gartner, this Zacks Rank #2 (Buy) company’s shipment grew 31.3% year over year, while IDC estimates 49.2% growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Mac revenues stands at $8.64 billion, implying 20.6% growth from the figure reported in the year-ago quarter.

Moreover, the consensus mark for iPad revenues is pegged at $7.19 billion, suggesting 20.4% growth from the figure reported in the year-ago quarter. iPad demand is also expected to have remained high due to online learning and increased adoption among enterprises.

Additionally, strong demand for the Apple Watch Series 6 and Apple Watch SE has been a game changer. During the to-be-reported quarter, Apple announced the availability of cardio fitness notifications with iOS 14.3 and watchOS 7.2 update.

Moreover, Apple introduced AirPods Max – its new over-ear wireless headphones.

Markedly, the consensus mark for wearables is currently pegged at $11.88 billion, indicating growth of 18.7% from the figure reported in the year-ago quarter.

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