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  • James Dunne

New Tariff Threats Highlight The Importance of Apple’s Services

Updated: Jul 4, 2019

The threat of new US tariffs on Chinese imports once again highlights the importance of Apple's burgeoning Services division.

Photo by Federica Galli on Unsplash

On Thursday, Apple (NASDAQ: AAPL) sent a letter to US Trade Representative Robert Lighthizer warning that proposed new tariffs on products imported from China would impact upon practically all of the company’s product line.

According to the company, the proposed tariff list “covers all of Apple’s major products, including iPhone, iPad, Mac, AirPods, and AppleTV.” In addition to this, “parts and batteries used to repair products in the United States” will also be affected, as well as “accessories that Apple makes for these devices, such as monitors and keyboards.”

Prior to this, Apple had remained noticeably quiet on the trade war issue, despite a large amount of manufacturing for Apple products taking place in China. This was largely because the company’s main hardware products were not being overly affected. However, a ratcheting up of tensions over the last month means that a further $300 billion worth of imports — virtually all remaining goods moved between China and America — are now potentially in the firing line for tariffs of up to 25%.

This is bad news for Apple, but it once again shows why their push towards Services might be the enduring legacy of Tim Cook.

The Push to Services

Outside of broader trade worries, there has been a lot of worries about falling hardware sales for Apple in the last year or so. In the most recent earnings call, for example, iPhone revenue was down 15% from the year previous.

Many analysts are blaming this on the growing market saturation of devices like the iPhone (15.8% globally in the fourth quarter of 2018), as well as very little notable new features coming with new releases, which means that people aren’t feeling as compelled to upgrade as before.

This will continue to be a problem for Apple going forward, so this is why we’ve seen a massive shift in focus over the past few quarters towards the more high-margin Services growth.

In the same earnings call, for example, Apple reported revenue growth of 20% in its Services segment to hit $10.9 billion, with gross margins of nearly 63%. Cook also said that Apple is on track to double its Services business from 2016 to 2020.

Apple’s Services division covers things like Apple Music, the App Store, iCloud, and Apple Pay. Going forward, it will also include many of the new initiatives announced by the company back in March like Apple TV+, Apple News+, and the Apple Card.

Just like the explosion we’ve seen in SaaS companies over the past decade, it’s clear that Apple wants to create various long-term subscription streams for users in any of its devices. And it’s clear that there are much larger plans on the horizon too, with Tim Cook stating in January of this year, “I believe, if you zoom out into the future, and you look back, and you ask the question, “What was Apple’s greatest contribution to mankind?” it will be about health.” When they eventually arrive at Apple, healthcare features will almost certainly fall within this high-margin Services division too.

Short-term concerns like trade tariffs will always worry investors, and with good reason. However, the combination of hardware, software, and services divisions that Tim Cook is building out with Apple is creating a sticky ecosystem that leads to lifelong customers. All of this, combined with its powerful brand, means Apple is a far more resilient company than some people give it credit for.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Apple. Read our full disclosure policy here.

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