Apple Isn’t Growing, And That’s Becoming a Major Problem

Apple, once the trailblazer with a $2T market cap and the first to hit $3T, now risks losing the race to the next milestone to their arch nemesis, Microsoft (NASDAQ:MSFT), who’s just 6% away from overtaking Apple as the world’s largest company.

Where’s the growth? Apple’s total revenue stagnated over the past year — a stark contrast to the other Magnificent Seven tech giants. The recent quarter saw a sales decline for each of its major hardware products (i.e., iPhones, Macs and iPads).

Making matters worse, Apple forecasts flat growth for the December quarter (while Wall Street expected 5%) — which is ominous considering “the December quarter typically sets the tone for the year,” per Bernstein analyst Tony Sacconaghi (Barron’s).

Apple’s saving grace… lies in its Services segment, encompassing a vast software ecosystem, including the App Store, Apple Pay and Apple TV+. This segment emerged as the only major business that grew in the recent quarter, claiming a record 24.9% of total revenue in Q4, up from just over 10% eight years ago.

• In August, Apple’s services business surpassed 1B paying users, doubling in the past three years and generating $81B in FY 2023 revenue.
• Services is also Apple’s most profitable business, *with a 70.9% gross margin in FY 2023 — double that of the company’s hardware business.

What can help reinvigorate Apple?

To counterbalance its hardware sales, Apple Pay is expanding rapidly, posing a bigger threat to PayPal (NASDAQ:PYPL). Approximately 80% of iOS apps now accept Apple Pay vs. 44% for PayPal. In 2022, Apple Pay’s transaction volume surged by 62% during the holiday season, constituting 7% of all e-commerce sales, according to Salesforce data. One Berstein analyst thinks this figure could increase to 30%.

However, some of Apple’s subscription products, like Apple TV+, are reportedly losing billions. To mitigate this, Apple has implemented price increases on its subscription services, with the latest announced last month, indicating a 43% rise in Apple TV+ prices and adjustments in other services, including Apple Arcade and Apple News+.

While Apple hacks away at hardware, financial services and streaming, one question is yet to be answered. Where’s the generative AI?