How Google Is Driving Apple Services Revenue Growth

Apple, Inc. AAPL is transitioning away from hardware sales and pivoting to a more subscription-based services revenue model. Ironically, one Wall Street analyst says rival Alphabet, Inc. GOOG GOOGL has been one of Apple’s biggest services revenue drivers.

The Analyst

Wells Fargo analyst Aaron Rakers reiterated his Market Perform rating and $210 price target on Apple.

The Thesis

Google’s distribution partner traffic acquisition cost payments to Apple have been a major source of Services segment revenue growth for Apple, Rakers said in a Friday note.

Apple receives massive licensing fee payments from Google in exchange for Apple using Google as the default search engine on its devices. Over the past 12 months, Google has made about $11.8 billion in TAC payments, and Apple has generated about $37.2 billion in total services revenue over the same period. Apple has consistently noted that licensing revenue has been one of the top three drivers of services revenue in the past five years.

Unfortunately for Apple, Google’s TAC growth as a percent of core revenue has started to level off in recent quarters, and Google may soon start pressuring Apple for lower rates in a relationship that Rakers said has been mutually beneficial up to this point.

“While there is no indication yet that Google could cut back on its licensing fee payments to Apple, we think that there is some risk that Google could push back on the payments in the future,” Rakers wrote in the note.

Price Action

Apple and Alphabet shares are down 20.4 percent and 13.8 percent, respectively, in the past three months.

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