Will slowing services growth eat into the Apple share price?

Big tech stocks have taken a hammering this earnings season, but Apple has proved to be something of an outlier. However, a slowdown in its services segment could be a cause for concern, especially as subscription prices rise ahead of the festive period.

– Full-year revenue growth in its services segment slows from 27% in 2020 to 14%

– Tim Cook said the division’s performance is unrelated to price hikes

– Apple accounts for 21% of the iShares Global Tech ETF

Apple [AAPL] has reportedly decided to freeze hiring outside of research and development. Unlike Meta [META], Microsoft [MSFT] and Snap [SNAP], which have all confirmed lay-offs over the past few months.

Amid the gloom of these lay-offs and an advertising slowdown, Apple seems to have avoided the fallout of dismal results reported by its rivals such as Alphabet [GOOGL] and Amazon [AMZN].

Although the Apple share price is down 7.25% in the last week through 8 November, it was the only big tech stock not to reverse after earnings, which it reported back on 27 October. Its Q4 2022 revenue was up 8% year-over-year and would have been in double-digits had it not been for a strong dollar and FX headwinds, CEO Tim Cook told CNBC.

Jim Cramer described Apple’s earnings as “an outlier in an otherwise brutal week for big tech earnings”. Nevertheless, Cook’s comments regarding revenue growth suggest that the strong dollar is putting a damper on international sales for the company.

Slowing services growth

Covid-19 lockdowns recently hit production of the iPhone 14 Pro and iPhone 14 Max at the tech giant’s manufacturing plants in Shanghai. China’s Covid-zero stance is “an absolute gut punch” for the Cupertino-based company “in its most important holiday quarter,” tweeted Wedbush analyst Dan Ives.

With the hiring freeze likely to impact the iPhone shipment and delivery front, the performance of Apple’s services segment will likely be in sharper focus when it reports earnings for the first quarter of 2023.

Services encompasses all things entertainment and media, including iTunes, the App Store, Apple Arcade, Apple Books, AppleCare and Apple TV. The unit has been the core engine of growth for a while now, and even its signature “Genius Bar” in-store customer support service is receiving part of the blow of the hiring freeze.

Services revenue grew just under 5% for the fourth-quarter to $19.2bn, a 21% share of its total revenue of $90.1bn, missing the $20.10bbn that analysts had expected, according to CNBC. For the full fiscal year, services revenue was up 14% year-over-year, a slowdown from the 16% growth rate reported in FY2021 and 27% in FY2020.

Apple ended FY2022 with 900 million subscribers, up from 745 million from the same period of 2021.

Higher subscription prices

Apple has also announced a series of price hikes. In the UK, for example, the cost of Apple TV is to rise from £4.99 per month to £6.99 per month and Apple Music will now cost £10.99 per month, up from £9.99.

In an interview with CNBC, Cook emphasised that the price hikes were “disconnected” from the company's services performance. “Well, if you look at the price increases as an example, Music, the licensing cost has increased,” Cook said.

Streaming competitors including Disney Plus [DIS] and Netflix [NFLX] have also raised their prices in recent months, so on the surface Apple’s decision seems fair. However, unlike its competitors, Apple only provides access to original programming and films through its streaming service and doesn’t offer a library of content from other networks.

The challenge facing Apple over the holiday season is whether subscribers will balk at the higher prices. “The big question is how much growth could slow, since I think a recession will hurt Apple more than analysts are projecting,” Jim Worden, chief investment officer of Wealth Consulting Group, told Bloomberg following the latest report.

Funds in focus: SPDR S&P 500 ETF

Apple is held by 403 ETFs on US markets, accounting for 1.2 billion of its shares. The largest fund holding Apple stock is the SPDR S&P 500 ETF Trust [SPY], in which Apple is the largest holding with a weighting of 6.54% as of 8 November. While the fund is down 18.6% year-to-date, it has climbed up 5.3% in the past month.

The tech company is also the biggest holding in the iShares Global Tech ETF [IXN], accounting for just over a fifth of the total portfolio at 21.09% as of 8 November. The fund is down 30.5% year-to-date, but up 3.6% in the past month.

The company is currently the second-biggest holding in the Putnam Sustainable Leaders ETF [PLDR], with a weighting of 7.3%. The fund is down 22.4% year-to-date, but up 4.7% in the past month.

Apple is also the third largest holding in the ProShares Metaverse ETF [VERS], with a weighting of 4.73% as of 8 November. The fund is down 5.30% in the past month and 32.3% since launching on 17 March this year.