Apple’s Services Growth Flywheel Continues To Strengthen

Posted on November 21, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Nov 16, 2023,05:19pm ESTForbes Forbes on Nov 16, 2023,05:19pm EST

Apple’s Services segment was one of the brightest spots in a relatively in-line earnings report at the beginning of November, topping an $85 billion run rate as growth jumped back to the high double-digits after a string of single-digit growth. Services demonstrated that its growth flywheel continues to strengthen with multiple outlets of opportunity in sight — from AI, to further growth in the installed base, to price hikes across different Services bundles.

Services Growth Outpaces iPhone, Apple

Since fiscal 2018, Services has become increasingly important to both the top and bottom lines for Apple. The segment has seen its share of revenue rise from under 15% five years ago to 22.2% at the end of September. Since then, Services has seen its annual run rate increase from ~$40 billion to over $85 billion, on track to surpass a $100 billion run rate potentially as early as the second half FY24.

FY21 was a breakout year for Services – the segment recorded greater than 24% YoY growth and generated more than $10 billion in gross profit each quarter, as its gross margin neared 70%. Gross margin has continued to stay above the 70% range, rising as high as 72.6% in Q2 FY22.

Source: I/O Fund

FY23 ending in September saw a full year growth rate of 7.1% YoY for $85.2 billion outpacing both iPhone and company-wide growth, with Q4 being the strongest quarter of the fiscal year with a growth rate of 16.3% YoY. The I/O Fund recently covered Apple’s earnings report more in-depth following fiscal Q4 here.

Since FY18, Apple has grown revenue at a 7.6% CAGR, meanwhile, Apple’s company-wide gross profit has grown at a 10.1% CAGR over the same period with profits partly impacted by Services’ rising contribution and expanding margin.

Compared to Apple, Services is seeing revenue and gross profit grow at much quicker rates – more than 9 percentage points higher for both metrics. Since FY18, Services revenue has grown at a 16.5% CAGR, outpacing Apple’s 7.6% growth rate as well as the iPhone’s 4.0% CAGR, due to the unevenness in revenue in between upgrade cycles – iPhone delivered YoY revenue declines in FY19, FY20, and FY23.

Services’ gross profit has expanded at a 20.1% CAGR, rising around 150% since FY18, from $24.2 billion to $60.3 billion as gross margin has expanded 10 percentage points, from 60.8% to 70.8%. This strong revenue and gross profit growth over the past five years has seen Services gain importance to Apple’s margins and its bottom line.

Source: Apple

In FY18, Services contributed 23.7% of Apple’s gross profit, whereas today, Services contributes 36% of gross profit.

The breakdown looks like this:

As Services’ share of revenue rose from 15% to 22.2%, it helped pull Apple’s gross margin ~580 bp higher in just five years. Product gross margin – iPhone, Mac, iPad, etc. – increased just 210 bp, meaning this expansion in gross margin is primarily coming from Services.

FY21 was a breakout year for Apple’s gross margin, expanding from 38% to more than 42% because of that growth in Services. Apple is guiding for gross margin to expand further in fiscal Q1 next year, to the 45% to 46% range – an expansion of 200 to 300 bp YoY, with Services’ growth rate forecast to be in the high-teens again.

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Services Seeing Multiple Growth Outlets

Services growth has been broad based, with new revenue records across a range of different offerings, and the segment has multiple growth outlets to lever in the future, from growth in paid subscribers, AI, and price hikes.

CEO Tim Cook explained on Apple’s Q4 earnings call that the Services segment “achieved all-time revenue records across App Store, advertising, AppleCare, iCloud, payment services, and video, as well as the September quarter revenue record in Apple Music.” CFO Luca Maestri added that Services “reached all-time revenue records in the Americas, Europe and rest of Asia-Pacific and a September quarter record in Greater China.”

What is driving these record levels across multiple Services offerings and in every geography worldwide is solid growth in active devices and strong growth in paid subscriptions. Paid subscriptions have risen at more than 27% annually over the past five years to 1 billion by the end of FY23.

Source: APPLE

Apple has surpassed 2 billion installed devices, and “continues to grow at a nice pace and establishes a solid foundation for the future expansion of the ecosystem.” Thus, the organic growth flywheel for Services remains soundly intact – growth in installed devices driving growth in paid and transacting accounts at a higher degree.

At the start of FY18, Apple reported that it had an installed active device base of 1.3 billion devices, meaning it had a ratio of about 0.18 paid subscriptions per 1 active device. Since then, installed devices have grown more than +50% to over 2 billion, while paid subscriptions have grown nearly +360% to almost 1.1 billion, or a ratio of about 0.5 paid subscriptions per active device.

Reaching new all-time highs in its installed device base signals further growth lies ahead for Services, especially as the ratio of paid subscriptions per active device continues to rise. Other outlets of growth arise from Apple’s recent price hikes and potential monetization opportunities from AI.

Additional Levers

Apple recently enacted some price hikes for News+, Arcade, and its One bundles, with the hikes ranging from $2/mo to $5/mo. As a whole, the price hikes could generate an additional ~$5 billion in annual revenue with just a 15% attach rate to Apple’s more than 1 billion paid subscriptions — however, the price hikes could incur a small amount of churn, among more price-sensitive consumers.

In terms of AI, Apple is not releasing any details about projects in development, though it is rumored that some of the AI products Apple is working on would improve Siri and Messages’ capabilities, or add features to Keynote, Pages, and Apple Music. Apple’s large language model ‘Apple GPT’ is reportedly under development, but a commercialization route is still undetermined. The next-generation of Apple’s software, iOS 18, macOS 15, and watchOS 11, are poised to bring AI features to Apple’s devices next year, as it works to catch up in the generative AI deployment race against OpenAI and Google.

For any of its AI products, there are three routes that could boost Services revenue – adding AI features for free in an aim to boost engagement across offerings, charging a subscription fee for AI features, or increasing prices of current bundles that incorporate AI. For example, if Apple charged for a stand-alone AI subscription at a $2.99/mo price point, it could rake in ~$10.8 billion in annual revenue at a 15% attach rate to its more than 2 billion active devices; boosting the prices of all of its subscription bundles by $0.99/mo could also add more than $10 billion annually.

In a previous Forbes article “AI Could Be Apple’s Next Chapter,” my firm pointed out that: “although Apple is tight-lipped about the progress of its AI projects, the so-called Apple GPT chatbot is rumored to be more powerful than Open AI’s GPT 3.5 model, according to The Verge. Apple is spending millions of dollars a day training the large language model Ajax on more than 200 billion parameters.”

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iPhone Demand Uncertain, China Risks Remain

Analysts have expressed concern over the holiday launch trajectory of Apple’s new iPhone 15, hinting that supply shortages, lower levels of consumer spending, and shorter wait times suggest weaker demand. The iPhone remains Apple's main source of revenue, and a conservative fiscal Q1 guide from the company along with heightened concerns over iPhone 15 demand add to risks that iPhone revenue growth in the near-term will remain depressed, after growing just +2.6% YoY in Q4.

Other concerns arise from Apple’s concentration in China, in regard to its iPhone supply base. Bank of America warned that Apple’s iPhone “supplier base remains largely in China,” which could “create many headwinds including around production, demand, [and] competition,” given that it is “hard to move all elements out of China.”

Services remains strong and a segment to watch, but we need the iPhone to participate and come in strong too, with a lingering risk to watch around China. Without the iPhone participating, Services is not enough to carry Apple’s stock alone, especially given its current valuation trading at levels hard to sustain.

Source: YCHARTS

Apple is currently trading at a 7.76x P/S ratio, above its 5-year median P/S ratio of 6.59x, with the 8.0x a level that Apple has struggled to hold on to since spiking to it in 2020. Apple is also trading at a nearly 28.8x forward P/E ratio, again another valuation level that it has struggled to hold on to – since late 2021, Apple has generally pulled back to below 24x forward P/E after trading above the 28 range.

Source: YCHARTS

However, another risk to watch is Alphabet’s antitrust trial, as it could have direct implications for Apple in the event of a negative ruling. Alphabet’s multi-billion dollar payments to Apple for Google to be the primary search engine on Safari across Apple’s devices is at the center of the trial, and that payment is rumored to be ~$19 billion this year – a key witness mentioned during the trial that Google is paying Apple 36% of search advertising revenue it generates via Safari. Should the scale of those payments constitute monopolization of the search market, Apple could be set to lose on a lucrative Services revenue stream.

Conclusion

Services is rapidly becoming one of Apple’s most important top-line segments, and arguably is the most important for Apple’s bottom-line, given its outsized role in boosting Apple’s gross margin. Organic growth has been a strong driver of Services’ +16.5% 5-year revenue CAGR and its +20.1% 5-year gross profit CAGR, both of which outpace Apple’s growth rates by more than 9 percentage points.

Should Services continue to grow in the teens for the next five years, such as at a 14% 5-year CAGR through FY28, it would be generating approximately $164 billion in revenue, or slightly more than 30% of Apple’s projected $538.6 billion in revenue. Price hikes, introduction of AI features, or finding ways to increase engagement and boost the ratio of paid subscriptions per active device all support this long-term revenue growth outlook for the segment.

Damien Robbins, Equity Analyst at the I/O Fund, contributed to this article.

The I/O Fund was early to AI with a 45% allocation in 2023. For more in-depth research from Beth, including 15-page+ deep dives on the 10 stock positions the I/O Fund owns, subscribe here.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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AI Could Be Apple’s Next Chapter

Posted on October 18, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Oct 13, 2023,05:15am EDTForbes Forbes on Oct 13, 2023,05:15am EDT

After Nvidia added $750 billion in value this year on the backs of surging AI chip demand, investors are quickly searching for the next trillion-dollar AI winner. AI is the best investment opportunity of our lifetimes, and although Apple (AAPL) has been relatively overlooked as an AI play, the tech giant could quickly become a force to be reckoned with in the AI space. The reason for this is simple. Apple can bring AI to the consumer’s pocket by the billions, and is rumored to be sitting on one of the best AI models on the market today, with comparable performance to OpenAI’s ChatGPT.

Two Billion Devices to Lever AI

Apple’s installed active device base surpassed 2 billion last February and “reached an all-time high in every geographic segment” at the end of the June quarter, according to CFO Luca Maestri. The iPhone’s installed base also “grew to a new all-time high,” and is estimated to have nearly 1.5 billion active devices worldwide, after adding around 500 million active devices since 2019—an 11.4% compound annual growth rate since then.

Source: I/O FUND

While installed active devices reached a new record, so did Apple’s subscriber base. CEO Tim Cook noted during Apple’s FQ3 report in August that the company hit an “all-time revenue record in Services” with “over 1 billion paid subscriptions,” which are growing at a double-digit rate. Apple has added more than65 million subscribers in the first half of this fiscal year and more than 300 million subscribers over the past two fiscal years heading into its fiscal Q4.

Source: I/O FUND

The opportunity for Apple to capitalize on AI arises from the combination of growth within Apple’s installed device base, along with increased engagement and adoption of paid subscriptions over time. Consumer interest in AI surged earlier in 2023 with ChatGPT garnering over100 million active users and more than 1 billion visits monthly. Apple’s installed base offers the chance to more than 10 times the number of individuals with readily available access to AI.

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Services Is Where AI Can Shine

Apple is witnessing a higher contribution from its services segment to both revenues and margins—the segment is approaching a $100 billion annual run rate, accounting for nearly 26% of revenue with a 70.5% gross margin.

In other words, services is contributing 41.1 cents to each dollar of gross profit, up from 34.6 cents just eight quarters ago. The segment has seen its contribution to gross profit increase steadily, rising 46% from 23.7 cents per dollar in FY18 to 34.6 cents per dollar to date in FY23. It is not out of the picture for services to soon contribute 50 cents of each dollar of gross profit as the segment surpasses $100 billion in annual revenue.

Source: I/O FUND

The importance of services to Apple’s bottom line cannot be overstated—that 70% gross margin level combined with its nearly $100 billion revenue scale has pulled Apple’s margins higher over the past few years and will likely continue to do so in the future as transacting accounts and paid accounts continue to grow to new all-time highs.

This is exactly where AI will have the most profound impact on Apple, and why the tech giant could emerge as a strong AI contender.

Google and Microsoft demonstrate the revenue potential of AI subscriptions at scale—for Microsoft’s Copilot, a 2.5% take rate of the ~382 million commercial Office 365 users would equate to nearly $3.5 billion in annual revenue, while a 10% take rate would see annual revenue reaching $14 billion, according to Macquarie.

In Apple’s case, it has nearly three times the paid subscription base as Microsoft that it could target with an AI product, via a stand-alone service or in one of its three pre-existing service bundles. Regardless of the route that Apple chooses, there remains billions in revenue potential. Offering a stand-alone AI subscription for $2.99 per month could rake in ~$10.8 billion in annual revenue at a 15% attach rate based on Apple’s more than 2 billion active devices, while boosting the prices of its subscription bundles could by $0.50 per month could add more than $5 billion annually.

Apple Can Bridge the Gap with Mass-Market Consumer AI

Apple is spending millions of dollars per day in a quest to develop a conversational AI model, potentially for Siri, that would allow iPhone and iPad owners to use voice commands for automating multi-step tasks with the voice assistant. As such, Apple is uniquely positioned to both monetize and implement advanced AI in a mass-market consumer application.

Consumers, especially Millennials, are very willing to adopt and pay for such voice assistants that are as smart and as reliable as a human. According to a PYMNTS survey from April, more than 42% are willing to pay $10 or more per month for an assistant.

Although Apple is tight-lipped about the progress of its AI projects, the so-called Apple GPT chatbot is rumored to be more powerful than Open AI’s GPT 3.5 model, according to The Verge. Apple is spending millions of dollars a day training the large language model Ajax on more than 200 billion parameters.

The project could find life integrated within Siri, given the applications within automating multiple tasks and range of capabilities stemming from image and video recognition.

Apple's Apple GPT model is rumored to be more powerful than OpenAl's GPT 3.5, as well as Google's LaMDA, Meta's LLaMA and LLaMA 2, and Anthropic's Claude 2 model. – Source: I/O FUND

Apple noted back in 2020 that Siri had more than 25 billion requests made per month, a figure that could easily be increased with a ChatGPT-like chatbot installed across billions of devices. That is how Apple can be the first big stock in consumer driven AI uptake.

On Real Vision, I previously pointed out that “if you take a consumer-facing company like Google,” that they are in a good position because Google doesn’t “have to go out and try to get lots of consumers to adopt something new, consumers will continue to use Search, it’ll just be improved Search; advertisers will continue to use Google, it’ll just be improved ROI.”

For Apple, it’s the same case – it does not have to try to convert millions of users into a paid subscriber in the way that OpenAI does; rather, it could easily integrate an advanced conversational AI model within Siri for example, and quickly convert already-paying subscribers over to those AI services.

Damien Robbins, Equity Analyst at the I/O Fund, contributed to this article

The I/O Fund was early to AI with a 45% allocation in 2023. For more in-depth research from Beth, including 15-page+ deep dives on the 10 stock positions the I/O Fund owns, subscribe here.

Apple Bets On The Emerging Markets Growth Story

Posted on June 5, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Jun 1, 2023,08:15am EDTForbes Forbes on Jun 1, 2023,08:15am EDT

The smartphone market continues to be hit hard in q1, with prices down 20% and shipments down 13%, according to Canalys. Despite double digit decline across the industry, Apple delivered marginal growth on its iPhone sales at +1.5%. According to Counterpoint Research, Apple grew smartphone shipments by 1 million year-over-year from 59 million in Q1 2022 to 58 million in Q1 2023. The decline of (1.7%) was better than the (14%) decline for the global smartphone market.

Source: BETH KINDIG

According to Apple’s management, the reason the company was able to overcome smartphone weakness was due to sales in the emerging markets. The company’s CFO, Luca Maestri, said in the earnings call, “We set March quarter records in several developed and emerging markets with India, Indonesia, Turkey and the UAE doubling on a year-over-year basis.”We set March quarter records in several developed and emerging markets with India, Indonesia, Turkey and the UAE doubling on a year-over-year basis.”

Within the emerging markets, India is a primary focus for Apple due to a growing middle class. According to a survey from a non-profit, the middle-class population has grown from 14% in 2004-05 to 31% in 2020-21. Tim Cook also points to the fact that the country is at a tipping point. “There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it's great to be there.”There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it's great to be there.”

Although Apple does not break down India sales figures, Bloomberg News reported that sales grew by 46% YoY to about $6 billion for the trailing twelve months ending March 2023. According to a Wedbush analyst, “Apple is now aggressively looking at India from both a production and retail expansion over the coming years that the firm believes will be a strategic poker move for Cupertino that could ramp annual revenue to $20 billion by 2025 in India.”

Tim Cook recently visited India in April and opened two company-owned retail stores. Apple was the second biggest revenue generating brand in India in 2022, second only to Samsung as it gained 18% of the total value of smartphone shipments, according to research firm Counterpoint.

The company also plans to make India a manufacturing hub and this move is seen as the company’s efforts to rely less on China. JP Morgan mentioned in its research note last year that the company plans to produce 25% of all iPhones from India by 2025. However, it could take a few more years to reach the 25% level. According to Bloomberg News, the company now produces 7% of total iPhones from India and this is up from 1% in 2021.

Apple supplier Foxconn announced recently that the company plans to invest $500 million to set up a manufacturing plant in India. It had also announced in March that it received approval from another state in India for a $968 million investment. Similarly, Foxconn has plans to expand its existing manufacturing plants in India.

There are 2 billion Apple devices active in the world and there are 659 million smartphone users in India, compared to 975 million in China and 276 million in the United States. With India being second place, it makes sense that Tim Cook is focused here.

Source: Statista

According to Morgan Stanley analyst Erik Woodring, “The firm's 2023 revenue and EPS forecast increased by 1% and 3%, respectively, post-earnings and while the firm calls out iPhone 15 and an AR/VR headset as the next catalysts, it adds "don't sleep" on the emerging markets and India story at Apple.”

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Apple’s Brand Needs a Catalyst

Warren Buffet was recently asked why he is invested in Apple and his reply was “If you’re an Apple user and somebody offers you $10,000, but the only proviso is they’ll take away your iPhone and you’ll never be able to buy another, you’re not going to take it. If they tell you if you buy another Ford car, they’ll give you $10,000 not to do that, you’ll take the $10,000 and you’ll buy a Chevy instead.”

Not surprisingly, Apple is one of the world’s most valuable brands, rivaled only by Amazon and Google.

Source: I/O FUND

Despite this strong brand, the next chapter for Apple has been slow to materialize. As seen below, wearables have not become the “next big thing” for Apple with $8 billion or so in revenue per quarter. Emerging markets are promising, yet at the $20 billion per year or $5 billion per quarter, Apple will struggle to move the needle for some time by relying on this strategy alone.

Earlier this month, we published an article “Apple’s Stock in Focus: More Profitable Than Banks” where we stated:

“Investors looking for the “next big thing” will point toward companies like Stripe, Sofi or Square as the leading fintech stocks. Meanwhile, the next big thing to disrupt the financial sector may be sitting in plain sight. Apple grew its cash trove through legendary design and hardware, yet how Apple chooses to leverage its enormous reserve of cash may be what writes the next chapter for the world’s most valuable company.”

Services remain a long-term opportunity for the company to monetize its installed base of over 2 billion active devices. Apple recently launched a new high-yield savings account that offers a 4.15% interest rate, which is 10 times higher than the United States national average and 415 times higher than what Chase or Bank of America offers at 0.01%. Apple is also lending from its balance sheet for the first time ever through Apple Pay’s Buy Now and Pay Later product.

To illustrate how effective Apple’s move into finance tech has become, the cornerstone product, Apple Pay, currently has 75 percent adoption among iPhone users. This is up from 10% in 2016. In addition to taking on banks, Apple is also competing with Mastercard and Visa with features that allow merchants to use iPhones and iPads to send and receive payments. The long-term goal is to replace wallets with iPhones.

Spotlight on Earnings

For some time now, Apple has been a value stock. We discussed this when we stated:

“While comparing to other popular value stocks like Walmart, Apple is trading at a slightly higher forward P/E ratio of 23 compared to Walmart’s 19. However, the company’s net profit margin of 25.71% is very good compared to Walmart’s 1.45%.

Similarly, Apple has an excellent free cash flow margin of 26.37% compared to Walmart's negative free cash flow margin of -5.15%. This helps illustrate why Apple’s stock has held up well as investors are able to participate in the most cash efficient company of all time while also participating in the company’s future innovation cycle.”

The most recent earnings results continue to prove that Apple’s management team is strong on efficiency. Despite revenue declining by (2.5%) YoY to $94.84B, the gross margin improved from 43.8% to 44.3% in the most recent quarter, up 50 basis points due to cost savings and a favorable mix from Services. The free cash flow margin remained solid at 27% compared to 26.4% in the same period last year. The board also authorized an additional $90 billion share repurchase and increased the quarterly dividend by 4% to $0.24 per share.

Source: COMPANY IR

Operating income declined by (5.5%) and net income declined by (3.4%) YoY to $24.2 billion. EPS of $1.52 remained unchanged from the same period last year, and notably, the company beat EPS estimates by 6.4%.

As stated, iPhone sales were up +1.5% to $51.3 billion. Mac revenue declined by (31%) YoY to $7.2 billion. This was due to a strong comp with M1 MacBooks sales from last year and a weaker consumer. iPad declined (13%) YoY to $6.7 billion. Wearables declined (0.6%) to $8.8 billion.

Services grew 5.5% YoY to $20.9 billion.

Paid subscriptions of 975 million, was up 18.2% YoY. This segment is important as there is a higher gross margin of 71% compared to 36.7% for products.

Management’s directional insights for the June quarter were soft with foreign exchange negatively impacting growth by about 4%. The company’s CFO, Luca Maestri, said in the earnings call, “We expect our June quarter year-over-year revenue performance to be similar to the March quarter, assuming that the macroeconomic outlook does not worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind and we expect a negative year-over-year impact of nearly four percentage points.”

Analysts expect revenue to decline by (1.1%) YoY to $82.03 billion.

Where Can Apple Stock Go from Here?

There are two scenarios we are tracking for Apple based on the current price information:

The blue count suggests that we are in a long and drawn-out correction that will ultimately be targeting new lows. If Apple stays below $181.50 and then breaks below $150.50, the odds that this scenario is playing out will become very high. If this plays out, we will look towards the blue target box for a major low.

The red count suggests that the January low for Apple was a major one. This will put us in the final push in the large uptrend that began in 2009. If Apple can break above $181.50, we can see a final push to the upper red target box between $192 – $210.

Source: I/O Fund

Apple is currently under the major resistance zone between $176.25 – $181.50. Based on the relative weakness in most markets right now – small caps, industrials, materials, financials, transportation, the Dow Jones, as well as many global markets – we are expecting volatility to return sometime in early June. If Apple fails to punch through the $181.50 resistance before the market pulls back, it will need to hold the $160 – $150.50 range in order to allow for this final swing into the red target zone above. Below $150.50 and the top will be in for Apple, as the odds will greatly increase that we will be testing Apple’s January lows.

Conclusion:

My firm does not own Apple at the moment, yet given its enormous brand value and high install base, it’s a company we track closely. In addition, the company’s strong financials will only become more attractive in the event of a recession. For our purposes, my firm would want to see Services materialize as a leading Fintech play, and we would want to wait for the price action outlined above to play out before buying this stock.

The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund does not own shares in AAPL at the time of writing but may own other stocks pictured in the charts.

Royston Roche, I/O Fund Analyst, contributed to this article.

Apple’s Stock In Focus: More Profitable Than Banks

Posted on May 4, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on May 1, 2023,10:07pm EDTForbes Forbes on May 1, 2023,10:07pm EDT

Investors looking for the “next big thing” will point toward companies like Stripe, Sofi or Square as the leading fintech stocks. Meanwhile, the next big thing to disrupt the financial sector may be sitting in plain sight. Apple grew its cash trove through legendary design and hardware, yet how Apple chooses to leverage its enormous reserve of cash may be what writes the next chapter for the world’s most valuable company.

The markets have clearly shifted from favoring top line growth to emphasizing bottom line strength. This reminder is echoed across every industry, but none more so than the finance industry where regional banks are defaulting due to high bond rates and depositor withdrawals.

It’s easy to dismiss the financial sector in today’s tech focused market. After all, financials only account for 11% of the total market cap of the S&P 500, with 3 sectors ahead of it. However, all companies depend on loans, and when banks get scared, the credit window shuts, which tends to lead to outsized bankruptcies. Simply put, banks cause the worst kinds of recessions. We detailed this more here.

Today, the tech industry has disrupted nearly every industry in its path from energy, to commerce, to automotive, to entertainment. Perhaps now is the time that tech will finally disrupt the banking sector.

Apple Is More Profitable Than Banks

JP Morgan has over $1.4 trillion on its balance sheet compared to Apple’s $165 billion. However, Apple is more profitable with $99 billion in profit last year, which is higher than JP Morgan and Citi combined. What Apple has to boot is access to 1.2 billion iPhone users. Therefore Apple may not have as much cash as a bank, but it’s fundamentally a more investable business model.

For stock investors, Apple’s large cash reserves are certainly not news as the company has more cash than any other tech stock. What’s news is that the FED is aggressively draining liquidity from the system as a means to fight inflation, as shown in the chart below, that compares the trends in liquidity to the S&P 500.

Source: I/O FUND

There has been a long-standing relationship to liquidity and asset prices, and until we can see a new liquidity cycle start, companies with cash will have better leverage over those that don’t. You can also expect volatility in the markets to remain high until there’s a new liquidity cycle, which we covered when we discussed where we hold cash.

The longer this plays out, the more ways Apple can leverage its $165 billion in cash as consumers will seek better financing terms, higher yields and credit lines will also increase.

For example, Apple recently launched a new high-yield savings account that offers a 4.15% interest rate, which is 10 times higher than the United States national average and 415 times higher than what Chase or Bank of America offers at 0.01%. Apple is also lending from its balance sheet for the first time ever through Apple Pay’s Buy Now and Pay Later product.

Apple has the best operating margin among the FAANG stocks at 30.7%. Net profit last quarter was $30 billion with free cash flow of also $30 billion.

Source: I/O FUND

Apple is not immune to the effects felt across corporate bonds and mortgage securities. According to CNBC, the company has $13 billion in unrealized losses. These losses are not reported as long as Apple plans to hold to maturity, and as long as the bond issuers are solvent enough to repay the debt. Also, a loss of $13 billion is not detrimental to Apple, as the company generates $100 billion in free cash flow per year. Notably, the company used to have $250 billion in cash reserves before increasing buybacks in 2017.

Apple has debt of $111 billion for a net cash balance of $54 billion. The company paid $3.8 billion in dividends and equivalents and repurchased shares worth $19.5 billion.

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What to Watch for in Q1 Earnings

Apple is not a growth stock. The company is known for strong margins, outsized cash flows, and stable balance sheet. The company’s revenue has been partly negatively impacted from the adverse FX movements. Analysts expect revenue to decline by (4.6%) YoY to $92.81 billion yet the company’s revenue is expected to grow after the June quarter.

Source: SEEKING ALPHA

On a fiscal year basis, Apple is expected to report a rebound next fiscal year:

Source: SEEKING ALPHA

Apple has the highest operating margins among the FAANG stocks. For EPS, Apple is expected to report the following:

Source: YCHARTS

Apple’s main segments are iPhones, Macs, iPads, Wearables and Services. Of these, the Mac segment is dragging on Apple’s results. Last quarter, Mac sales declined by (29%) YoY to $7.7 billion. Management expects revenue to decline double digits due to challenging comparable with the M1 Mac Books from last year and a weaker consumer.

According to IDC, there was a YoY decline of (29%) in the shipments of traditional PCs in Q1 2023 due to weaker demand and excess inventory. The report from IDC suggests that Macs declined by (40%) in Q1 2023.

iPhone sales in the December quarter declined by (8%) YoY to $65.8 billion yet were flat excluding foreign exchange rates. Management expects revenue to accelerate in the March quarter when compared to the Dec quarter, per the earnings call: “For iPhone, we expect our March quarter year-over-year revenue performance to accelerate relative to the December quarter year-over-year revenue performance.”

According to the research firm Canalys, the global smartphone market declined by (13%) YoY in Q1 2023. The report from Canalys states that Apple gained 3% in global market share from 18% to 21% driven by the demand for iPhone 14 Pro series. Samsung was the only leading vendor to report QoQ growth and also regained the #1 position at 22% market share.

The Services segment is the second largest segment after iPhone. This is where payment services and loan products will show up. Many investors see this as the long-term opportunity as Apple is monetizing it’s installed base of over 2 billion active devices. The installed base grew by 8% YoY. Services revenue grew 6% YoY to $20.8 billion and grew double digits excluding foreign exchange rates.

The company has more than 935 million paid subscriptions, up 19% YoY. Per CFO, Luca Maestri, The growth is coming from every major product category and geographic segment, with strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam.”strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam.”

Big Tech is Propping up the Nasdaq

In the early phase of a bull market, we tend to see expansive buying amongst most sectors and markets, with a relative focus in your economically sensitive sectors like small caps and high beta names. This is simply not the case right now. In fact, what we are seeing is a handful of big tech names propping up the markets. Meanwhile, underneath this, economically sensitive stocks are getting aggressively sold while Big Tech props up the market.

Source: I/O FUND

Furthermore, the percentage of Microsoft and Apple’s combined weighting in the S&P 500 has never been higher. The S&P 500 weighting is according to market cap, which is price times float. The longer buying happens in these two names, accompanied with selling in other areas of the index, the percentage weighting becomes stretched to unhealthy extremes. This is not characteristic of a burgeoning bull market; instead, it is the type of behavior we see at market tops.

Regarding Apple’s price chart, we believe that the bounce off the October 13th low in 2022 is starting to top out.

I/O FUND

We have been talking about the $169-$170 price target for many months in our premium service. Now that we are here, you can see how the market is trying to push higher on weaker volume and weaker momentum. We could see a push to the $175 region in this final push higher, but soon, AAPL will have to correct. If the structure of this correction is a 5 wave decline, then we will be targeting new lows. On the other hand, if this pullback is a 3 wave move, we could see a move back to the $145 region only, before a fresh attempt higher is made.

Note on Valuation:

Apple is trading at a premium with a current PE ratio of 28. The stock does not tend to hold well at a PE ratio of 30.

Source: I/O FUND

The forward PE Ratio of 28 is also stretched and does not hold well at this level historically.

Source: I/O FUND

Conclusion:

Apple is the most likely candidate to disrupt the financial sector. The company’s reach of 2 billion devices has assisted its slow roll-out of payment services with 75% of iPhone users opting into Apple Pay. One can only imagine the potential success Apple may have in leveraging its cash for higher yields during a time when banks are weak in reputation and balance sheets.

In the upcoming earnings report, expect weakness in Macs to overshadow the other segments. iPhones are expected to be flat yet the Services segment is where fintech growth will show up. Overall, this is unlikely to be a standout quarter for Apple on the top line, so look for surprises on the bottom line to drive the stock.

We have Buy levels we are targeting for Apple, which we share with our premium research members each week as the stock progresses. We believe our target buy level will set us up for gains in Apple’s stock when the next bull cycle begins. We provide in depth macro and individual stock analysis so that readers can better understand why we buy/sell. In this market, we frequently take gains.

We also issue real-time trade alerts when we enter and exit stocks. YTD, our firm has held the two top performing assets in the tech industry – Nvidia and Bitcoin — at high allocations. We also issued a buy alert with NVDA last year at $108 and with Bitcoin in the $16,000 region, based on the type of analysis we provide. You can learn more here including information on our next webinar, this Thursday at 4:30 pm Eastern, where we review our positions live.

Portfolio Manager Knox Ridley and Equity Analyst Royston Roche contributed to this article.

Recommended Reading:

Google Cloud Will Not Be Able To Overtake Microsoft Azure

Posted on December 8, 2020June 30, 2026 by io-fund

This article was originally published on Forbes on Dec 3, 2020,11:03pm EST

Google Cloud certainly has the technical chops and engineering talent to compete with Microsoft Azure and Amazon’s AWS when it comes to cloud infrastructure, edge computing – and especially inferencing/training for machine learning models. However, Google may lack focus due to Search and YouTube being the main revenue drivers. This is seen from the company’s inability to ignite revenue growth in the cloud segment during a year when digital transformation has been accelerated by up to six years due to work-from-home orders.

In this analysis, we discuss why Google (Alphabet) may have missed a critical window this year for the infrastructure piece. We also analyze how Microsoft directed all of its efforts to successfully close the wide lead by AWS. Lastly, we look at how all three companies will bring the battle to the edge in an effort to maintain market share in this secular and fiercely competitive category.

Cloud IaaS Overview:

The three leading hyperscalers in the United States have diverse origins. Amazon found itself serendipitously holding server space year-round that it could rent out and was first to market by a wide lead. Amazon continues to release customization tools and cloud services for developers at a fast clip and this past week was no exception.

Microsoft’s roots in enterprise created a direct path to upsell on-premise and become the leader in hybrid. The majority of the Fortune 500 is on Azure as they want seamless security and APIs regardless of the environment.

Google is one of the largest cloud customers in the world due to its search engine and mass-scale consumer apps, and therefore, is often first to create cloud services and architectures internally that later lead to widespread adoption, such as Kubernetes. Machine learning is another piece where Google was one of the first to require ML inference for mass-scale models.

Despite all three having very talented teams of engineers and various areas of strength, we see AWS maintain its lead and Microsoft Azure firmly hold the second-place spot. Keep in mind that Azure launched one year after Google Cloud yet has 3X the market share and is growing at a higher percentage.

CANALYS

Google Cloud grew two percentage points from 5% to 7% since 2018 while Azure grew four percentage points from 15% to 19% in the same period. In the past year, Google Cloud saw a 1% gain compared to Azure’s 2% gain, according to Canalys.

Azure is under Intelligent Cloud but the company does break down the growth rate which was 48%. Although Google Cloud Is not specifically broken down, the Google Cloud segment grew 45% year-over-year compared to Microsoft Azure up 48% year-over-year.

Amazon Web Services is growing at 29%, which is substantial considering the law of large numbers. In the past two quarters, Google Cloud reported 43% year-over-year growth and 52% in the quarter before that. Microsoft has seen a slightly less deceleration from 51% and this is down from the 80%-range almost two years ago.

The key thing here is that when Microsoft held the percentage of market share that GCP currently holds, Azure was growing in the 80-90% range. This is the range we should be seeing from Google Cloud if the company expects to catch up to Azure.

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In 2020, the term “digital transformation” has become a buzzword with cloud companies seeing up to six years of acceleration. Nvidia is a bellwether for this with triple-digit growth in the data center segment in both Q2 and Q3. Despite this catalyst, Google has lagged the category in Q2 and Q3 in terms of both growth and percentage share of market. If there were any year that Google Cloud could pull ahead, it should have been this year.

Alphabet has emphasized that GCP is a priority and the company will be “aggressively investing” in the necessary capex. However, the window of opportunity was wide open this year and aggressive investments would ideally have been allocated during the years of 2017-2018 to stave off Azure’s high-growth years with 80-90%.

Google is Capable but Lacks Focus

There is no argument that Alphabet is an innovator within cloud and a leader in its own right. Across public, private and hybrid cloud, containers are used by 84% of companies and 78% of those are managed on Kubernetes – which has risen in popularity along with cloud-native apps, microservices architectures and an increase in APIs. Kubernetes was first created by Google engineers as the company ran everything in containers internally and this was powered by an internal platform called Borg which generated up to 2 billion container deployments a week. This led to automated orchestration rather than manual and also forced a new architecture away from monolithic as server-side changes were required.

Kubernetes also helps with scaling as it allows for scaling of the container that needs more resources instead of the entire application. Microservices dates back to Unix, while Kubernetes, the automation piece around containers, is what Google engineers invented before releasing it to the Cloud Native Foundation for widespread adoption.

Just as Google was one of the first to need automated orchestration for containerization of cloud-native apps, the company was also one of the first to require low-power machine learning workloads. The compute intensive workloads were running on Nvidia’s GPUs for both training and inferencing until Google made their own processing unit called Tensorflow (TPUs) to perform the workload at a lower cost and higher performance.

Performance between TPUs and GPUs is often debated depending on the current release (A100 versus fourth-generation TPUs is the current battle). However, the TPU does have an undisputed better performance per watt for power-constrained applications. Notably, some of this comes with the territory of being an ASIC, which is designed to do one specific application very well whereas GPUs can be programmed as a more general-purpose accelerator. In this case, the benchmarks where TPUs compete are object detection, image classification, natural language processing and machine translation – all areas where Google’s product portfolio of Search, YouTube, AI assistants, and Google Maps, for example, excels.

GOOGLE

Notably, TPUs are used internally at Google to help drive down the costs and capex of its own AI and ML portfolio and they are also available to users of Google’s AI cloud services. For example, eBay adopted TPUs to build a machine learning solution that could recognize millions of product images.

Unless Google releases an internal technology as open-source, it won’t be adopted by the competitors. This is where Nvidia’s agnosticism becomes a positive as it’s universally used by Amazon, Microsoft, Google —- and Alibaba, Baidu, Tencent, IBM and Oracle. Meanwhile, TPUs create vendor lock in which most companies want to avoid in order to get the best capabilities across multiple cloud operators (i.e. multi-cloud). eBay is the exception here as the company needs Google-level object detection and image classification.

In a similar vein of Google being early to the company’s internal requirements, BigQuery is also a superior data warehouse system that competes with Snowflake (I cover Snowflake with an in-depth analysis here). BigQuery has a serverless feature that makes it easier to begin using the data warehouse as the serverless feature removes the need for manual scaling and performance tuning. Dremel is the query engine for BigQuery.

BigQuery has a strong following with nearly twice the number of companies as Snowflake and is growing around 40%. Due to AWS being a first mover and having a large cloud IaaS market share, Redshift has the biggest market presence but growth is nearly flat at 6.5%.

Point being, Google has important areas of strength and first-hand experience – whether it’s in data analytics, machine learning/inference or cloud-native applications at scale. Google’s search engine and other applications are often the first globally to challenge current architectures and inferencing capabilities.

However, as we see in the contrast between Google and Microsoft in the most recent earnings calls, Google has a hard time prioritizing cloud over the bigger revenue drivers. Meanwhile, Microsoft has a no holds barred approach with one, singular focus: Azure.

Q3 Earnings Calls

The most recent earnings calls from both Microsoft and Google could not have carried more contrast. Google focused primarily on search and YouTube while adding towards the last half of the call that GCP is where the majority of their investments and new hires were directed. Notably, one analyst wondered if the capex investments would eat at margins and produce enough returns.

Microsoft, on the other hand, held an hour-long call that was nearly all-Azure including what the company is doing right now to capture more market share, a laundry list of large enterprises coming on board and strategic partnerships to strengthen its second place standing. The company’s beginning, middle and end was Azure and cloud services.

Here is a preview of how the two opened:

Thanks for joining us today. This quarter, our performance was consistent with the broader online environment. It's also testament to the investment we've made to improve search and deliver a highly relevant experience that people turn to for help in moments big and small. We saw an improvement in advertiser spend across all geographies, and most of verticals, with the world accelerating its transition to online and digital services. In Q3, we also saw strength in Google Cloud, Play and YouTube subscriptions.

This is the third quarter we are reporting earnings during the COVID-19 pandemic. Access to information has never been more important. This year, including this quarter showed how valuable Google's founding Product Search has been to people. And importantly, our products and investments are making a real difference as businesses work [indiscernible] and get back on their feet. Whether it's finding the latest information on COVID-19 cases in their area, which local businesses are open, or what online courses will help them prepare for new jobs, people continue to turn to Google search.

You can now find useful information about offerings like no contact delivery or curbside pickup for 2 million businesses on search and maps. And we have used Google's Duplex AI Technology to make calls to businesses and confirm things like temporary closures. This has enabled us to make 3 million updates to business information globally.

We know that people's expectations for instant perfect search results are high. That's why we continue to invest deeply in AI and other technologies to ensure the most helpful search experience possible. Two weeks ago, we announced a number of search improvements, including our biggest advancement in our spelling systems in over a decade. A new approach to identifying key moments and videos, and one of people's favorites hum to search which will identify a song noticed based on the humming. -Sundar Pichai, Q3 2020 Earnings CallSundar Pichai, Q3 2020 Earnings Call

Compare this to the tone for Microsoft’s earnings call …

We’re off to a strong start in fiscal 2021, driven by the continued strength of our commercial cloud, which surpassed $15 billion in revenue, up 31% year-over-year. The next decade of economic performance for every business will be defined by the speed of their digital transformation. We’re innovating across the full modern tech stack to help customers in every industry improve time to value, increase agility, and reduce costs.

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Now, I’ll highlight examples of our momentum and impact starting with Azure. We’re building Azure as the world’s computer with more data center regions than any other provider, now 66, including new regions in Austria, Brazil, Greece, and Taiwan. We’re expanding our hybrid capabilities so that organizations can seamlessly build, manage, and deploy their applications anywhere. With Arc, customers can extend Azure management and deploy Azure data services on-premise, at the edge, or in multi-cloud environments.

With Azure SQL Edge, we’re bringing SQL data engine to IoT devices for the first time. And with Azure Space, we’re partnering with SpaceX and SES to bring Azure compute to anywhere on the planet.

Leading companies in every industry are taking advantage of this distributed computing fabric to address their biggest challenges. In energy, both BP and Shell rely on our cloud to meet sustainability goals. In consumer goods, PepsiCo will migrate its mission critical SAP workloads to Azure. And with Azure for Operators, we’re expanding our partnership with companies like AT&T and Telstra, bringing the power of the cloud and the edge to their networks. Just last week, Verizon chose Azure to offer private 5G mobile edge computing to their business customers. -Satya Nadella, Fiscal Q1 2021 Earnings (Calendar Year Q3 2020)Fiscal Q1 2021 Earnings (Calendar Year Q3 2020)

The calls continue in a similar manner with Microsoft making it clear they have their entire weight behind cloud while Google must continue to cater to its largest revenue drivers – search and consumer. The main takeaway we get from the call is that Google is investing in GCP rather than a takeaway of market dominance or growth. Here are a few examples:

As we’ve told you on these calls, given the progress we’re making, and the opportunity for Google Cloud in this growing global market, we continue to invest aggressively to build our go-to-market capabilities, execute against our product roadmap, and extend the global footprint of our infrastructure … And another: An obvious example is Cloud. We do intend to maintain a high level of investment, given the opportunity we see. That includes the ongoing increases in our go-to-market organization, our engineering organization, as well as the investments to support the necessary capex. So, hopefully, that gives you a bit more color there. And, also here … And the point that both Sundar and I have underscored is that we are investing aggressively in Cloud, given the opportunity that we see. And, frankly, the fact that we were later relative to peers, we're encouraged, very encouraged, by the pace of customer wins and the very strong revenue growth in both GCP and Workspace. We do intend to maintain a high level of investment to best position ourselves. And I kind of went through some of those items, the go-to-market team, the engineering team, and capex. And so we describe this as a multi-year path because we do believe we're still early in this journey.

The question remains if aggressively investing will have the same impact after the digital transformation has been accelerated by up to six years. Nobody could have predicted covid and the work-from-orders but we see from the growth rates on large revenue bases that AWS and Azure were better positioned to answer the demand.

Edge Computing: No rest for the weary

The race for cloud IaaS dominance is only beginning and the hyperscalers are not resting on their laurels as they compete for the edge. Major strategic partnerships are being struck with telecom companies to break open new uses cases for decentralized applications and increased connectivity. Google mentioned Nokia in their earnings call while Microsoft mentioned AT&T, Verizon and Telstra. Amazon also has partnerships with Verizon and Vodafone. (For brevity sake, you can assume every telecom company is either partnered or will be partnering with multiple hyperscalers for edge computing).

Here is a breakdown of the buildout and how these strategic partnerships plan to profit from 5G. The result will be new use cases, such as remote surgery, autonomous vehicles, AR/VR and a significant number of internet of things devices that aren’t feasible with 4G and/or with the current centralized cloud IaaS servers.

AWS Wavelength:

Amazon’s edge computing technologies are being rapidly built-out. For example, Wavelength is being embedded in Vodafone’s 5G networks throughout Europe in 2021 after being in beta for two years. This will provide ultra-low latency for application developers enabled by 5G. On Vodafone’s end, they have developed multi-access edge computing (MEC) to fit both 4G and 5G networks to process data and applications at the edge. This lowers processing time from about 50-200 milliseconds to 10 milliseconds. Amazon is also expanding its Local Zones to offer low-latency in metro areas from L.A. to about a dozen cities in 2021.

In order to support its retail business, AWS built out 200 points of presence where serverless processing like Lambda can run. The network latency map will be enhanced by telco partnerships who have about 150 PoPs per telco.

Microsoft Azure with Edge Zones:

Azure has the largest global footprint across the cloud providers. Where AWS has been the long-standing developer preference, Microsoft is the C-suite/enterprise preferred company across the Fortune 500. Microsoft’s goal will be to move compute closer to end users and to offer Azure-hosted compute and storage as a single virtual network with security and routing.

Microsoft excelled at hybrid as a strategy for taking market share (which I also detailed as the investment thesis for my position in Microsoft after the company missed Q3 2018 earnings and prior to winning the JEDI contract). Azure Edge Zones extends the current hybrid network platform to allow distributed applications to work across on-premise, edge data centers both public and private, Azure IaaS both public and private. This allows the same security and APIs to work seamlessly across these hybrid environments. The overarching performance will attempt to combine the range of compute and storage capabilities of Azure with the speeds/low-latency of the edge.

Google Cloud with Global Mobile Edge Cloud (GMEC):

Google is also partnering with telecom companies such as AT&T to deploy Google hardware inside AT&T’s network edge to run AI/ML models and other software for 5G solutions. Similar to AWS and Azure, the goal is to open up new use cases for industries, such as retail, manufacturing and transportation.

Anthos for Telecom is a Kubernetes-orchestrated infrastructure that can be deployed anywhere including an AWS cluster. In this way, the strategy for Google continues to amplify its strengths which is containerized network functions to merge edge and core infrastructure. This helps with decentralized applications and could potentially compete with “network slices” to where AT&T could potentially use local breakouts to offer a cloud service tier in a few years from now.

Conclusion:

We’ve seen Google build some of the best products for developers in terms of automating microservices and container-orchestration with Kubernetes and also ASIC chips (TPUs) that compete with the likes of Nvidia. I’m not betting against Google’s talented engineers by any means, rather I’m simply observing that the infrastructure piece is leaning towards more of a duopoly at this time. Cloud is expensive on a capex level, so if Google doesn’t find its footing, the margins driven by ads could take a hit in the near-term.

Who will lead software and AI applications is impossible to predict (and when) as the main competitors will be hundreds (if not thousands) of startups. With that said, I personally own Amwell because Google is a backer and I think health care is an example of a vertical where Google’s experience with data can deliver a serious competitive edge. To be clear, Alphabet may have an advantage with AI/ML software whereas this analysis is about the infrastructure. Perhaps there will be a catalyst in the future for Google Cloud to take more share but the strategy is not evident at this time.

Apple’s Stock Price is at Inflection Point

Posted on November 9, 2019June 30, 2026 by io-fund

As Apple’s stock price powers to new highs, returning over 60% YTD and touting the highest market cap in history, now might be a good time for investors to reflect as Apple trades at resistance. With upwards of $260 billion in revenue, a profit margin of 22%, Apple is a cash-generating machine. It produces around $50-$60 billion in free cash flow annually, with reserves of over $100 billion. It is extremely kind to shareholders, with one of the largest buyback programs on the Street. In fact, Apple has spent around $120 billion in stock buybacks since the beginning of 2018, and kicks out a dividend. Apple is, without question, one of the greatest businesses the world has ever seen.

However, there are times where great businesses do not always make great stocks at times. If we look at the current valuations, Apple’s stock price is trading with a P/S of 4.5, a P/E ratio of around 25 and a price to free cash flow of 20, as of the writing of this report. While these valuations are relatively mild compared to some of the valuations being shopped around in the tech industry, for a company with a market cap of $1.3 Trillion, these valuations suggest future growth in order to justify current prices. It is here, with their future growth prospects that I see caution.

Apple’s Stock Price is Up While Revenue is Down

In 2019, the company had revenue of $260 billion, down from $265 billion in the previous year. Analysts originally expected the company’s revenue to grow to $274 billion, or 5.3% this fiscal year, and around $294 billion or 7% in the following fiscal year. This will be slightly below the 7.2% growth that is expected among information technology stocks.

In the latest quarter, its growth rate was just 1.8%, significantly lower than what other FAANG companies reported. Facebook revenue grew by 28% while Amazon rose by 23%. Netflix and Google had revenue growth of 31% and 20%, respectively. Even Cisco grew by almost 5%. And for further comparison, the US economy expanded by 1.9%.

Apple’s poor growth would have tanked any technology stock, yet Apple’s stock price is up 60%. Though I believe Apple has the cash as well as the capability to pull numerous pivots in its future, the loss in revenue will likely accelerate before these pivots can manifest, which will compress margins, and thus affect current valuations.

iPhone Saturation – Will it Affect Stock Price?

If we dig deeper into their latest revenue report, we discover that smartphone sales declined YoY by 15%. Saturation is an inevitable phenomenon for revolutionary inventions. For example, Utilities and wireless phone coverage were once considered hyper growth sectors at one point in time, but the inevitable saturation took hold, leading these companies to now be considered defensive value plays. Saturation appears to be taking hold in the smartphone market, which is why we are seeing a deceleration in smartphone sales YoY; with an expected 2% fewer sales per year going forward.

Furthermore, with saturation, we see manufacturers start to slash prices to capture fewer units sold. This quarter, Apple reported that iPhone sales declined by 9% since the previous year and that they are also reducing the price of their new iPhone 11. Both news items point to the reality of market saturation.

The iPhone is arguably the greatest tech driver in history, as well as Apple’s primary source of revenue. So, Apple will have to cover the losses with their other products to make up the difference. This is where I see the inconsistency between the stock’s valuations and their current offerings.

Services

Apple’s services generate revenue through various subscription fees. These fees come from several well-known Apple services, including iCloud, iTunes, Apple Music and various types of apps.

Although these services grew by 18% this last quarter, the total revenue generated was only 37% the size of iPhone sales. This level of growth is simply not enough to cover decreasing revenues from Apple’s iPhone sales.

Furthermore, there are also concerns in the service sector. The problem is that the services that Apple offers have relatively lower margins than the iPhone. A good example of this is Apple Music. Apple doesn’t disclose Apple Music’s gross margins, but going by Spotify’s own margins, we have every reason to believe that Apple is similar. Spotify’s gross margin is just 26%, which is smaller than Apple’s iPhone net profit margin. It’s important to note that the services segment of Apple is tied to the iPhone and may experience slower growth as the smartphone market continues to saturate.

Apple +

There’s also a lot of hype around Apple TV+’s potential at filling the growth gap. According to the Wall Street Journal, Apple is spending more than $6 billion on new content, and it’s only likely to go up as the streaming war continues.

At current prices for the service, it’s impossible for Apple to make a profit even with a hundred million subscribers. Apple can still be a contender in this crowded space, but it will likely take time, and be more of a cash drain than a generator in the short-term. Meanwhile, smartphone saturation is only going to continue, which means that Apple TV+ will not be able to solve Apple’s current revenue problems.

Apple Pay

Apple Pay is another service that Tim Cook talks about repeatedly. During the latest earnings call, he revealed that the service had surpassed PayPal in terms of volume of transactions. The service is also expanding into various markets. Additionally, Cook also praised Apple Card, a new product developed in collaboration with Goldman Sachs that promises to expand Apple’s revenue.

Apple Pay has the potential to generate a large cash flow, but there are questions about how big it can get. In the trailing twelve months, PayPal had a gross revenue of $17 billion and a net income of $2.53 billion. Visa and Mastercard had a combined revenue of $38 billion and a net income of $17 billion. So even if Apple were to dominate this market, its consolidated net income will not be sufficient to cover the loss in iphone sales. And, more importantly, it will take time to take market share, which will not solve the revenue issues Apple currently faces.

Apple Wearables

Another area that’s worth looking at are Apple wearables. In the last quarter, revenue from wearables, home and accessories rose by 54% to $6.5 billion. This growth was driven by the success of various Apple products, particularly Apple Watch, Airpods, and BIS products.

These wearables are great products that do have higher margins, just like the iPhone. The big question, however, is if they can grow fast enough to offset losses in iPhone sales. Despite its great performance, Apple’s wearables, home and accessories business is still behind the Mac division, which earned $6.9 billion during the fiscal fourth quarter.

Meanwhile, Apple’s iPhones generated $33.36 billion in revenue this final fiscal quarter, despite a 9% decrease year on year. So the important point in all this is that, despite their tremendous growth, Apple wearables and accessories are just not in the same league as iPhones.

Buybacks and Apple’s Stock Price

Any other tech company with decelerating revenue, and the likelihood of continued deceleration in the near term, while facing an end of cycle environment that will eventually affect the consumer, would not see their share price increase to such valuations. So, it’s worth noting the importance of one of Apple’s key components in their current strategy, which is not a permanent solution.

Apple has turned to buybacks to boost its stock and spend its cash hoard. Since January last year, the company has spent more than $120 billion on buybacks. The question, though, is how effective these buybacks are to retail investors.

Large companies with growth problems have used buyback programs as short-term solutions for sluggish performance. In the short-term, share repurchases can help boost a stock price. However, in the long-term, Apple’s share price growth will depend on the performance of certain specific segments. The chart below shows Apple’s diluted EPS growth in the past five years.

Source: Ycharts

Technical Outlook for Apple’s Stock Price:

Structure

As a technical analyst, I do not go against the trend until I see either a rewarding risk/return set-up at key levels, or a noticeable shift in trend emerges. Apple is currently in an incredibly strong uptrend since bottoming in December of 2018; however, Apple’s stock price is at a significant level.

It’s worth noting that it’s 2019 uptrend appears to be in a corrective fashion – a series of 3 waves up, which is always point of caution. Typically, when I see this, it points to a correction in a larger degree prevailing trend.

Furthermore, if we take the length of the first wave up off the December low to its peak in May of 2019, it went up 51.63%. After bottoming out in July of 2019, Apple’s stock price began the current wave up. You’ll notice that Apple’s share price is at the symmetrical percentage growth of the first wave – 51.63%, which coincides with the 100% extension.

In technical analysis, the market tends to move in symmetry, especially in corrections, and the $258-$262 range will act as major resistance for Apple’s continued charge up. This is exactly what we have seen as well, as Apple’s stock price has been hovering around this level for many trading days. If it can close above the $262 range and hold on to that region, I believe there is a strong possibility that it will trade up to the 250% extension of the 30-year cycle uptrend of around $300.

However, if Apple cannot break above the $260 range, it could retest the $222 price range. If it falls below this range then the yellow target box will be in play, thus confirming that the uptrend from the December low was merely a powerful correction in a much larger decline.

Also Read: Apple is Not a Growth Company Anymore

Internal Strength

If we look at Apple’s internals, a few points jump out. For one, the volume is decreasing as the stock price is increasing, suggesting there’s not broad participation in this uptrend, and that may be the result of weak buying volume on top of even weaker selling pressure. If this is the case, as soon as buyers get exhausted, we could see a sharp decline.

The MACD is currently at its highest point in Apple’s history, the second highest was in September of 2018. An elevated MACD is a bullish sign, but when we hit extremes, it becomes a point of caution. The RSI is in a current uptrend along with price. If this uptrend breaks along with the price, we could be in for a retest of important support zones. I will be watching the RSI for a clue to a change in momentum.

Knox Ridley runs a premium site alongside Beth Kindig. You can check out her fundamental analysis on Apple on this site.

Apple Stock: A New Era of Mobile Saturation

Posted on March 22, 2019June 30, 2026 by io-fund

Debuting in 1980, Apple is nearing its 40th anniversary on the stock market. The company has undergone many pivots successfully from computers to improved operating systems, to iPods, iPhones, app stores and music services. Many of these pivots were executed beautifully, with the most recent one being Apple Music, which took a majority of market share in music streaming within 4 years in the United States.

Of course, the iPhone is Apple’s force extender. One quick glimpse at the stock chart history and it’s easy to see something important happened in 2008. The invention has sold over 2.2 billion units with an average price tag of $793. The iPhone altered the United States economy, creating a thriving developer ecosystem while 87 percent of smartphone profits despite selling 18 percent of all smartphone units. With the iPhone’s release, Apple not only became one of the biggest companies in the world, but it also has more cash reserves than most countries’ GDP at $285 billion.

There are many positives to Apple’s story beyond the iPhone, with a wearables business up over 50%, cloud services up 40%, and Apple News readership at 85 million active monthly users. Apple Music is also now the number one streaming service in the United States over Spotify and closing the gap globally with 53M subscribers vs 83M subscribers. Most importantly, Apple has a media announcement planned for March 25th, which will add to the growing services revenue.

Earnings reported on January 29th, 2019 were more encouraging than anticipated following the lowered guidance. Apple beat earnings at $4.17 compared to last years $3.89. Total revenue was lower at $84 billion, down by 4.51% and beat guidance by $312 million. Future guidance expects revenue between $55 billion and $59 billion for this quarter to be reported at the end of April. Gross margins are expected between 37 percent and 38 percent. The company has a hoard of cash and the stock pays an increasing dividend.

Investors should exercise caution, however, as the broader mobile market is slowing down and is at the point of saturation. Mobile has been the de facto leader for tech growth during this historical bull market, and has provided consistent YoY returns that the dot-com bubble would be envious of. Investors should recognize mobile has reached its top as a primary driver across tech growth stocks, and I do not believe the mobile slowdown is over yet, or that the full effects have been completely reflected in earnings.

Apple can (and will) pivot. One day, the company will be known for health services, vehicle software, as a media titan, and more. However, But to expect one quarter of decreasing iPhone sales before the stock resumes previous heights would defy the laws of the tech hype cycle. Apple simply has not hit the iPhone bottom, and the effects of mobile saturation are not fully reflected yet in the company’s earnings.

The Fifth Factor: Mobile Saturation

Apple noted four factors that impacted results when the company provided guidance in November: “different iPhone launch timing from a year ago, FX headwinds, supply constraints on certain products and macroeconomic conditions in emerging markets.” I would call this the 1,000 foot-view while the 30,000 foot-view tells us the fifth factor is mobile saturation. Eventually, everyone has a television set and a laptop – and now, a smartphone. This will continue to be the reality that Apple contends with.source: https://www.statista.com/statistics/263441/global-smartphone-shipments-forecast/

The smartphone market contracted in 2017 to 1.462 billion units and in 2018 to 1.42 billion units, and is expected to return to minimal yet positive growth percentages at a CAGR of 2.5%. While 1.5 billion smartphones per year is substantial, the law of saturation is likely to drive prices down, with Android owning 85% of the market today, and we see decreasing iPhone penetration in China where lower-priced competitors gain market share.

IDC estimated Apple will sell 242 million smartphones by 2022 up from 221 million in 2018. The issue with these estimates is that IDC does not break down the percentage of potential decline between 2018 to 2022. The most up to date number available from IDC is an anticipated decline of 0.8% in worldwide smartphone sales in 2019, published on March 6th.

We saw China decline 10% last year in global shipments of smartphones. Taiwanese company, TSMC, is the sole supplier of iPhone core processor chips and told Nikkei Asian Review that the company is cautious about demand for high-end smart phones, which is a nod toward Apple from a main supplier. Samsung Electronic’s Vice President Lee Myung-jin told investors in late January that “demand for memory chips has declined in the fourth quarter as external circumstances worsened and customers adjusted their orders” and he believes the decline “will continue in the first quarter, as key customers keep adjusting their orders.”

Huawei eats market share in Asia and is currently the world’s fastest-growing smartphone seller. The company sold 200-million units in 2018, posting 30% growth from the 153 million units sold in 2017 and has seen a 66x increase from the 3 million units sold in 2010.

Huawei edged out Apple with 14.6% of the global smartphone market compared to Apple’s 13.2% share in Q3 2018. China’s Xiaomi also posted 21.2% growth. Therefore, a resolution to the trade war or other macro conditions may not actually revive iPhone sales as Chinese smartphone makers appear determined to gain domestic ground. In 2018, the iPhone had an average sales price (ASP) of $793 while Huawei’s ASP is $269 in China and about $380 in Europe. The ASP for Xiaomi is $138. Politics and trade war aside, one indication of saturation and post-euphoria consumer behavior is when consumers seek lower prices as a trend becomes more commonplace. Longer replacement cycles and lack of innovation on the device, such as new applications, also point towards a market at its peak.

China represents roughly 1/3rd of smartphone penetration compared to the United States at 1/12th. We can see over the last few years that the United States had the lowest CAGR of any region globally. According to Pew Research, 77% of Americans own smartphones, a jump from 35% in 2011. If Apple is losing market share in China, this leaves Latin America, where the average sales price of the iPhone is prohibitive.

Apple’s Pivot to Services

There is no reason for investors to not be hopeful about the upcoming media announcement, although as Apple Music has shown, it may take up to 3 years before it adds significantly to the top line. Many investors may ignore the mobile saturation issues or believe the bulk of the iPhone decline is priced into the stock. If Apple is a core holding, the arrival of a new direction is likely to be welcomed. Today, services account for 18% of Apple’s overall quarterly revenue at $9.9 billion or $37 billion annually with handsome margins of 62.8%. Apple has executed Apple Music beautifully since 2015 and is now the top music streaming service in the United States, much to Spotify’s chagrin. To give you a comparison and a glimpse into the media services possibilities, it took Spotify twelve years to gain 80+ million subscribers while Apple reported over 50 million in three (brief) years. OTT media endeavors require a note of caution, however, especially for those companies creating original content. Historically speaking, Amazon had a content budget of $4.5 billion in 2017 for an audience of 27 million viewers. As Jeff Bezos told Hollywood Reporter at that time, “When people join Prime, they buy more of everything” and the losses on original content are recovered. Apple will also need to recover the losses on original content. Some anticipate that Apple will recoup the costs of original content with a 30% revenue split from the other channels they plan to aggregate on the platform.

While Apple may be able to pull off migrating users from their trusted favorites, such as Hulu, Prime, Netflix, Showtime and HBO, it will be interesting to see how quickly Apple can make back the investment of paying the likes of Oprah Winfrey, Jennifer Aniston and more big names for the original content they plan to offer. There’s also speculation Apple may bundle services like Spotify and Hulu do today, where the two services are offered for about a $3 discount at $17.99. Regardless the monetization strategy, Apple’s media announcement is likely to help the stock, despite the many warning signs of a distressed mobile market.

Takeaway:

Apple has a history of successful pivots, and services will add a projected $100 billion in revenue by 2023. However, I believe we haven’t found a bottom yet on mobile saturation. In 2017, Apple sold 19 percent of the smartphones purchased globally, yet captured 87 percent of the profits. My prediction is that those days of the peak mobile market are over. Even if earnings see-saw for a few quarters, there will be a downward trendline from this peak. Apple will make a better investment once mobile saturation has run its course. I believe the stock price we see today is overly optimistic in regards to the eventual slow down across the mobile industry.

Image credit: Apple

Can Programmatic Ads Save Spotify?

Posted on November 2, 2018June 30, 2026 by io-fund

Summary: According to Q3 earnings calls, Spotify may seek to broker user data in order to keep average revenue per user afloat. Known as programmatic advertising, this method of monetizing data to supplement music revenue may be Spotify’s only hope to stave off competitors who nip at the heels of the music-streaming app

Portions of this article were originally published September 27th, 2018 under 8 Reasons Spotify will be a Sell Recommendation by 2019 at $184 per share. This analysis has been updated to include the recent partnership with Google and programmatic offering Ad Studio.Spotify will be a Sell Recommendation by 2019 at $184 per share. This analysis has been updated to include the recent partnership with Google and programmatic offering Ad Studio.

Half Full or Half Empty? -6% ARPU in Q3 Compared to -12% ARPU in Q2

Spotify Technology met its Q3 forecast for paying subscribers and a few other metrics, but average revenue per user declined due to promotional accounts for families and students. Spotify ended the period with 87 million Premium subscribers worldwide, up 40% year-over-year. Spotify has 109 million monthly active users of its advertising-supported streaming service, up 8 million from Q2 or 20% YoY.

This quarter, Spotify’s average revenue per user percentage has improved but QoQ growth is still in the red. Average revenue per user declined to $5.50 in Q3 from $5.83 in Q2, or -6% following -12% the previous quarter.

Costly Partnership with Google

Spotify lacks the razor-razor blade Gillette analogy for tech companies, which in this case states you should have ownership of a device if you want to bank on the subscriptions. This is one reason I’ve been long on Roku since its IPO. Roku players are the cheap razors that will deliver the razor blades of ad-supported content in the OTT market. (You can read my analysis on Roku here). However, this lack of device ownership is causing trouble for Spotify. Smartphones dominated by Apple and Google are only part of the story. At home assistants such as Alexa are being designed and leveraged specifically for AI activated music services. To get a glimpse of Spotify’s future, consider that major record labels let Amazon offer a reduced Alexa version of the premium service at $3.99 per month and Apple is requiring users to sign in to Apple Music to power the HomePod – which completely shuts out devout Spotify users.

Spotify’s new strategy is to partner with Google to offer free Google Home Mini speakers to users who subscribe to the Family plan as part of a holiday season promotion. The partnership comes at a cost of approximately 50 basis points to the Gross Margin profile in Q4, the company noted. From Google’s standpoint, they get their entry level smart speaker into more homes, while Spotify benefits by having a partner for smart home infrastructure. Ultimately, this is one example of the lengths Spotify will have to go to in order to compete with Apple and Amazon on their home turf.

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Apple has Homefield Advantage

Most certainly, Apple won’t be beat in its own ecosystem. Apple revolutionized digital music with the iPod and iTunes. With smartphone penetration, the Beats acquisition, its Homepod ecosystem and a huge push into connected car infotainment, Apple can surround Spotify in nearly every direction. Keep in mind, that 66% of the world’s paying app users are iPhone users who trend towards higher incomes (vs. only 34% on Android), so Apple users are supremely important for Spotify’s $9.99 subscriptions.

In fact, the turf war has already receded Spotify’s market share. Record industry sources state Apple is adding paying subscribers at a rate of 5 percent in the U.S. versus 2 percent for Spotify, and that Apple Music may have already taken over Spotify as the number one streaming service in the United States.

In addition, Apple was cleared to complete the acquisition for UK-based music recognition app Shazam Entertainment for $400 million. Due to the threat this poses to Spotify and other smaller apps, regulators in seven countries contested the acquisition when Apple’s plans were first announced. Despite these efforts, the acquisition was approved in August of 2018. To date, Shazam has had well over 1 billion downloads, last reported in 2016, and owns a wealth of information on what music is trending with over 20 million searches per day.

Can Programmatic Ads Save Spotify?

Tim Cook is a chief critic on how applications and websites use private data to increase the accuracy of targeted advertising. Therefore, one area Apple clearly won’t compete is in the brokering of programmatic ads based on users’ music choices. Meanwhile, Spotify has every intention of letting advertisers target its users through Ad Studio.

Spotify would not be the first mobile application to supplement its core product with a programmatic offering. Facebook and Twitter owe at least 1/6thto 1/4thof their current revenue to programmatic proving it can substantially increase average revenue per user. Therefore, if Ad Studio is executed correctly, it may have the potential to limit stock losses even with stiff competition from Apple and Amazon.

Here’s a statement from Spotify’s press release:

“Last quarter we said that we expected our Programmatic and self-serve products to become a significant portion of our Ad-Supported revenue. If we’re successful in achieving this shift in revenue mix, then we also expect to achieve significant operating leverage in the ad sales business, increasing our operating margins. Last quarter we reported on our new automated self-serve platform, Ad Studio, which is live in the US, UK, Canada, and Australia. Ad Studio revenues are still quite small, but we’re seeing exponential growth, so expect to hear more about this product in future quarterly updates.”

Note About Tencent Music IPO:

Spotify owns Tencent Music Entertainment (TME) shares and it’s been stated in past financial reports that “a TME IPO would trigger a fair market value adjustment to the carrying value of our investment recognized in other comprehensive income. The gain could be significant.” This one-time, non-recurring event would generate a Net income for Spotify with a Net loss returning in the following quarters. Spotify stock holders should be aware that this one-time wave may be worthwhile to hold on for, but that the long-term prospects of the company are still not proven.

Conclusion

Spotify is a small fish in deep waters. Q3 earnings prove music streaming is a tough business. The company is attempting to partner with device owners, like Google, but these partnerships will eat away at Gross Margins in future quarterly earnings. I’m forecasting that Spotify will be in sell status through 2019 unless they can prove themselves with a strong programmatic offering through Ad Studio. Note the Tencent Music IPO will generate a net income for Spotify in the current quarter.

You can access more analysis on Spotify here.

This article and previous Spotify analysis written by Beth Kindig has been published on Seeking Alpha. All original analysis contained herein should be appropriately credited to Beth Kindig.

The Good, the Bad and the Ugly About Google’s $5 Billion Antitrust Fine

Posted on July 20, 2018June 30, 2026 by io-fund

To summarize, the $5 Billion Antitrust Fine on Google is due to the following issues:

Google has required manufacturers to pre-install the Google Search app and browser app (Chrome), as a condition for licensing Google’s app store (the Play Store);
Google made payments to certain large manufacturers and mobile network operators on condition that they exclusively pre-installed the Google Search app on their devices; and
Google has prevented manufacturers wishing to pre-install Google apps from selling even a single smart mobile device running on alternative versions of Android that were not approved by Google (so-called “Android forks”) source: European Commission

New gadgets and the promise of AI have helped to successfully rebrand Google’s search and advertising business, however, it’s important to remember that Alphabet is still an old-fashioned advertising company with nearly 90% of Q1 2018 revenue, or $26.6 billion, coming from advertising and only 15%, or $4.6 billion, coming from these other ambitions.

Therefore, understanding the nuances of advertising especially as it relates to data collection is going to be key for Alphabet investors. Unfortunately, top-rated analysts struggle to understand Alphabet’s business model and CEO Sundar Pichai did not offer any answers. In the Q1 2018 earnings call, Mark Mahaney of RBC Capital Markets asked if the “GDPR or other regulation is likely to impact materially the targeting capabilities that advertisers have on Google?” The CEO replied:

“You know, above everything else as we are working through GDPR we are making sure we are focused on getting that user experience right for our users and our partners. But to clarify your question further, you know, first of all, it’s important to understand that most of our ad business is Search, where we rely on very limited information, essentially what is in the keywords to show a relevant ad or product.”

This answer was over-simplified at best. Yes, Search is a large driver of revenue but what are the other portions of the advertising machine which will be affected? And how much revenue do the higher risk methods currently contribute to earnings?

Data & the $5 Billion Antitrust Fine: The Good, The Bad and The Ugly

The Good: Search Doesn’t Need Data; Gmail, Chrome and Google Maps Have User Consent

Quite a few of Google’s data-driven applications and services such as Gmail, Chrome and Google Maps can easily obtain user permission in exchange for the services these applications and browser provides. In addition, Google AdWords, which is based off search intent, will provide a safe haven for Google’s advertising revenue as this does not require the company to harvest private data. However, even search is not immune as it’s been enriched with data such as location to enhance search results.

The Bad: Android OS Collects Surveillance-Level Data without User Consent through pre-installed applications

While pre-installed applications help cement Google’s search dominance, there is much more going on behind the motivation for risking antitrust violations. It’s hard to know where to start when looking at Google’s sprawl of potential data regulation and antitrust issues. We could start with the fact they have a deal with data brokers that gives them access to 70% of our purchases made with credit cards and debit cards (without consent). The company is literally in your bank account. This is for the purpose of letting advertisers know if you completed a sale following an ad seen on one of Google’s properties. Another place to start is implicit data for advertising purposes, which uses your search history to target ads to you outside of Google search. This is why when you privately email your friend about a trip to Rome, you mysteriously get advertisements for flights to Rome on other websites. In one study of 850,000 internet users last year, mainly in the U.S. and Europe, Google tracked 64% of all pages loaded by mobile and web browsers.

While online tracking and conversion tracking are both invasive, the Android operating system is a surveillance-level behemoth with over 2 billion devices in circulation while littered with millions of applications leaking data to Alphabet’s advantage. Exponentially speaking, Android is impossible to contain. One study by the French research organization Exodus Privacy and Yale University’s Privacy Lab found that more than three in four Android apps contain a third-party tracker which extracts personal information, including location and in-app behavior. The apps the trackers were discovered includes Uber, Twitter, Spotify, and Tinder. The Privacy Lab found the in-app trackers revealed “an extensive data mining market buried within the mobile app ecosystem” enabling physical surveillance including through the use of WiFi, Bluetooth and ultrasonic sound inaudible to the human ear to track geolocations in real time.

Takeaway (from my article dated May 31st): Android will be the most likely source for fines by the European Union as it will be challenging to partition device IDs by geographies. Some have conjectured Alphabet will risk fines before voluntarily reducing their cyber intelligence. The fines are 1.6% of annual global revenue, or $4.4 billion for Google.

Update: Antitrust is a much better approach to breaking up the monopoly Google has on data collection.

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The Ugly: Walking the Razor’s Edge Between Data Violations and Non-Personalized Ads

Data collected from the Android OS augments and enriches data science modeling for Alphabet to monetize the data elsewhere. That “elsewhere” is Adsense, AdX and AdMob. Google’s AdSense and AdX Networks enable non-Google websites to incorporate Google display advertising, and this is what current publishers are in an uproar about.

To summarize, Alphabet is attempting to become a co-controller for data in some instances and a processor in other instances. It’s unknown how the European Union will view data leaks from publishers to Alphabet.

Source: Quora

The level of involvement Google has as either a co-controller or processor is important for investors to understand as these regulations continue to play out. This may be hard to imagine today, but if data collection returns to property-owned data collection only, then the premium price advertisers pay for Google ad inventory may diminish as Google will struggle to differentiate itself from other advertising options from a campaign ROI standpoint if or when it fails to get the proper consent to collect the data and broker the ads.

Source: Statista

The worst case scenario here is that Google has to display “non-personalized” ads where consent isn’t obtained — which Google is already prepared to do: “As previously announced, we’re also launching a Non-Personalized Ads solution (DFP/AdX, AdMob, AdSense) to enable publishers to present EEA users with a choice between personalized ads and non-personalized ads (or to choose to serve only non-personalized ads to users in the EEA).”

As mentioned above, this is where the premium price can potentially recede. By being forced to serve non-personalized ads, the competitive advantage Google has will diminish in this circumstance.

Bottom Line:

While Search is intact, there are many layers to data collection and ad targeting which will lower ROI campaign performance as the data Alphabet is allowed to collect continues to wane. In this article, we’ve discussed that the Android OS is leaky and the most likely part of Alphabet’s business to be fined. As far as revenue is concerned, non-personalized ads is the potential weakness especially on network sites as $17.59 billion was earned from network sites annually in 2017.

New Trends in On-the-Go Entertainment for Flights and Cars

Posted on June 12, 2018June 30, 2026 by io-fund

Smartphones have popularized the concept of on-the-go entertainment with users now spending over five hours per day on their mobile device. This steady demand is great for businesses as long as this usage has reliable 3G or 4G broadband, or WiFi access. Data efficiency decreases the farther one travels from metropolitan areas, whether that be by plane or automobile, whereas the demand for entertainment is constant.

In-flight entertainment systems and broadband are popular with 70 percent of survey respondents citing they would be willing to pay 7 USD for connectivity[1]. Total revenue from these passenger connectivity services will reach $5.4 billion by 2025 growing at a rate of 23 percent CAGR[2].

Wireless in-flight entertainment is expected to reach 9000 aircrafts by 2021 with connected commercial aircrafts reaching 23,100 by 2025. Market size is expected to reach 9.82 billion by 2024[3] with in-flight broadband growing at a CAGR of almost 11% [4].

While these estimates seem in-line, the IFE connectivity may achieve an even higher trajectory due to High Throughput Satellites (HTS). Connectivity will increase 3x reaching 1,500 Gbps by 2017 while increasing 5x to 285 Gbps in 2018. These increased data speeds will also lower costs contributing to more widespread adoption for IFE services.

Cars are also pushing forward on-the-go entertainment with the global in-car market expected to reach $33.8 billion by 2022 up from 14.4 billion in 2016. The automotive landscape is undergoing a drastic change with only 2% of cars online in 2012 compared to an estimated 90% to be connected to the IoT by 2020. [5].

An Infographic on Key Trends in On-the-Go Entertainment: