Apple Pay Looks Hugely Successful

Ashraf Eassa, The Motley Fool

Updated Wed, Aug 15, 2018, 7:10 PM

For a while now, Apple (NASDAQ: AAPL) has been talking up its fast-growing services business. It's not hard to see why. Services, which includes "revenue from Digital Content and Services, AppleCare, Apple Pay, licensing and other services," is Apple's second-largest segment by revenue (behind the iPhone).

More importantly, services are becoming a larger part of Apple's overall revenue mix over time, and that should bode well for Apple's bottom line. In the most recent quarter, the segment made up 17.9% of sales, up from 16% in the year-ago quarter. As this growth continues, services performance will continue to increase the company's margins, according to comments made by company CFO Luca Maestri.

Apple executive Craig Federighi on stage.

Image source: Apple.

One service that has been quite successful for Apple has been its mobile payments service, Apple Pay. On the company's July 31 earnings call, management shared some encouraging information about Apple Pay that investors might want to pay attention to. Let's dive in.

More than 1 billion transactions

"Well over 1 billion" Apple Pay transactions occurred during the June quarter-- tripling the number of transactions that took place in the same period a year ago.

"To put this tremendous growth in perspective, this past quarter we completed more total transactions than great companies like Square and more mobile transactions than PayPal," Apple CEO Tim Cook explained.

The momentum doesn't seem to be slowing, either. Cook further disclosed that the rate of growth in Apple Pay transactions during the June quarter accelerated from what the company saw in the prior quarter.

Apple receives a small percentage of the value of each transaction made with Apple Pay, so this growth in transaction volume goes directly to the company's bottom line.

More markets, broader acceptance

Per Cook, Apple Pay "is now live in 24 markets worldwide with over 4900 bank partners," and the company is looking to bring Apple Pay to the German market "later this year."

Beyond just adding new markets to the mix, Apple is working to expand Apple Pay acceptance.

"In the U.S., eBay is beginning to enable its sellers to accept Apple Pay and CVS Pharmacy and 7-Eleven will roll-out Apple Pay acceptance in locations nationwide this fall," Cook explained.

The idea here is simple: The more places that Apple's customers can use Apple Pay, the more transactions each customer is likely to make using the service, potentially driving revenue and profit growth for its services business.

Transit and peer-to-peer opportunities

Cook called out transit as "another important area of growth" and told investors that "Apple Pay can be used with iPhone and Apple Watch to quickly and conveniently ride public transit in 12 metropolitan areas."

Back in December of 2017 with the introduction of iOS 11.2, Apple augmented Apple Pay with the capability to "send and receive money with friends and family quickly, easily, and securely."

"Apple Pay Cash, our peer-to-peer payment service, is already serving millions of customers across the U.S. less than eight months following its launch," Cook asserted. This is a good start, but Apple must continue to work to bring Apple Pay to other markets. Just over half of Apple's total revenue comes from outside North America, so to really move the needle, Apple must seek out markets outside the United States.

Investor takeaway

Apple's services business continues to be an impressive source of revenue growth for the company, and within Services, Apple Pay appears to be doing quite well. The company is making the right moves by bringing Apple Pay to new regions and more locations. New feature additions like Apple Pay Cash can also serve to sweeten the deal.

Although the Apple Pay opportunity is interesting because of the additional revenue it can bring to the table, it might also be a way to further lock users into the iOS ecosystem. If users become accustomed to using Apple Pay Cash to transfer money, it will increase the switching cost of moving away from the iPhone because users would need to adopt not only a new phone ecosystem but also a new payment platform. In this way, Apple Cash and other Services both diversify the company's revenues and strengthen the company's core iPhone business.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, PayPal Holdings, and Square. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and short September 2018 $80 calls on Square. The Motley Fool recommends CVS Health and eBay. The Motley Fool has a disclosure policy.

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