Apple (AAPL 2.54%) -- despite Apple Music, the App Store, iTunes, iCloud, Apple Pay, and so on -- is a hardware company. Always has been. Yet there is a limit to how far it can grow on device sales alone, and its new product reveal last Monday reflects a plain pivot harder toward services, with Apple TV+, Apple Arcade, Apple Card, and others.
In this segment from MarketFoolery, host Chris Hill and analyst Abi Malin talk about why those additions to the Apple empire just didn't excite the market, what it will take for any of them to move the profit needle for the company, which one has the strongest potential, and the missing pieces of the puzzle that could induce more excited investor reactions down the road.
A full transcript follows the video.
This video was recorded on March 26, 2019.
Chris Hill: We should start, though, with Apple. We ended yesterday's episode, Jason and I, opining about Apple's event. Now there's any number of stories out there. For those who missed it, the headline is, they came out, they unveiled the Apple TV+, the Arcade gaming, the Apple credit card. We're going to dig into this further on Motley Fool Money this week. I'm curious, what's your main takeaway from their event?
Abi Malin: I think the market in general was pretty underwhelmed, and I can't say that I differ so much, but I didn't necessarily have higher expectations. Apple traditionally has been a hardware company. We're really seeing them try to pivot. We're at this inflection point for them, and it's either going to be make or break as they start to look at more software.
The good thing for them is that they do have an installed base of an estimated 1.4 billion active devices. If anyone should be able to do it, they have a pretty good head start. It's just unproven right now.
Hill: That's a keyword. I agree with you, by the way. The reaction from the analysts in general, it was sort of the analyst equivalent of a shoulder shrug. But I do think that there is a way in which this plays out that suddenly gets analysts on board. If you were playing a drinking game during this event yesterday, and you unfortunately drew the card that said, "take a drink every time Tim Cook says the word services," you were probably being rushed to the hospital about 30 minutes in. He was really emphasizing the services side. The thing is, look, if they can get enough people to subscribe, whether to the News service that they have, whether it's the TV service, if it starts to meaningfully move the needle on the services revenue, then I think all of a sudden, people get converted to believers pretty quickly.
Malin: Yeah. The good news is that services was only about 6.5% of total 2018 revenues. It's still relatively small for them. Just, at such high numbers, the law of large numbers in general works against them. To move that needle, it's going to have to be pretty impactful. I think a lot of analysts were looking for information on pricing for how those were going to affect both top and bottom lines. That just wasn't given yesterday.
Hill: I had mentioned on yesterday's episode that the thing I was going to be watching was, are they going to bring out showrunners? We know they're going to spend money on content, but who's going to be producing it? And they brought out, arguably, two of the biggest names in entertainment in Steven Spielberg and Oprah Winfrey, along with Reese Witherspoon, Jennifer Aniston, Steve Carell. And I was thinking more about it this morning, and I just thought -- and this seems weird to say, because you can make a pretty good argument for Steven Spielberg being the most successful film director of the last 40 years just in terms of commercial success and artistic success -- and yet, I couldn't help but think that people like Spielberg and Oprah Winfrey are aimed more at my generation and older. And I thought, "What if, instead, Apple had struck a deal with someone like Jordan Peele?" You know, a younger writer-director --
Malin: On the rise.
Hill: On the rise. Who is a fan of movies and is not curious about, "What is his next movie going to be?" in the wake of last year, with Get Out, and just recently, this new movie, Us. I don't know. It's not to say it can't work. But for all of the attention that Spielberg and Oprah Winfrey got, I felt like it wouldn't surprise me if that ends up being the weakest link of what they unveiled yesterday, and the credit card actually ends up moving the needle.
Malin: I think the credit card has the most potential, but that's probably one of the most difficult competitive landscapes that they're trying to break into. They did launch Apple Pay in 2014. They've had success there, but it's still a trickle. I don't know if it's as fast as everyone was anticipating it would be. I think Tim Cook gave the targets that he was looking for 70% of U.S. retailers and 40 countries by the end of the year. Again, large numbers, not necessarily humongous. I just think it's going to be more challenging.
Hill: Right. I think the fact that Apple said, "Oh, and by the way, we're also going to produce a physical credit card," I think that speaks to your point. It's like, "Oh, yeah, because if Apple Pay were truly ubiquitous, they wouldn't do that."
Malin: We wouldn't need that, yeah.