By Sam Boughedda
Bernstein analysts told investors in a research note Tuesday that Apple (NASDAQ:AAPL) Services growth has decelerated for six consecutive quarters, and gross margins contracted last quarter.
The analysts, who have a Market Perform rating and$125 price target on the stock, explained that the weakness has been driven by softness in Apple's Advertising and App Store businesses, which collectively account for an estimated 60% of revenues and 75% of Services profits.
"Advertising has declined from an estimated 60%+ growth in Q3 21 to negative growth in Q1 23, while App Store growth has averaged 4% growth over the last 4 quarters," the analysts wrote. "Aside from these two segments, growth has been much steadier for Apple's other Services businesses, averaging 15% over the last 13 quarters."
Bernstein sees Services growing 10% in FY23, and 13% at constant currency, in part due to weaker advertising growth. However, the firm believes that weaknesses in Advertising and the App Store are cyclical rather than structural.
"The digital advertising market is expected to rebound to low double-digit growth, and AAPL should grow faster given its own advertising business," the analysts added. "We also forecast App store revenues should grow low double digits (lower for gaming; higher for subscriptions)."
Overall, Bernstein sees Apple Services growing 12% to 15% over the next three to five years, driven by installed base growth, increased ARPU, and new services offerings.