Why Apple Arcade could give services a shock

Apple stock (AAPL) fell after the publication of its record quarterly results. While the numbers themselves were worthy of a rally — even in the face of macro headwinds — the conservative guidance ultimately sent Apple shares lower. Supply chain issues still plague many companies.

Despite CEO Tim Cook’s knack for dodging and sneaking into the worst supply chain problems, Apple has been known to err on the side of caution. It is much better to set the bar low, with an increased chance of flying over the mark, than to run the risk of a surprising flop, even if it means eclipsing a record quarter.

Indeed, direction is all investors seem to care about these days, but who can blame them, with all the recession chatter we’ve been hearing? I’m bullish on Apple.

Great Quarter; Perspectives too conservative?

As for the numbers themselves, it was the Mac that got the chance to flex its muscles, thanks in part to the release of its powerful new M1, M1 Pro and M1 Max chip lines. Services really shined, with 17% growth.

Going forward, services could continue to propel Apple’s gross margins much higher. Morgan Stanley analyst Katy Huberty sees Apple maintaining gross margins well above 42% due to supply chain improvements, among other operational improvements.

I think she’s right about the money. A continued surge in services could also propel margins to incredibly attractive new heights.

Currently, the Apple One bundle is an intriguing value for users. Apple TV+, its video streaming service, got off to a slow start, but it’s really picking up speed, with a Best Picture Oscar now in the bag.

For 2022, Apple could attract even more mainstream media attention once it’s time to roll out the red carpet again.

Growth of Apple Services

Hit shows like Severance and Pachinko have received incredibly high ratings according to RottenTomatoes and IMDb. Indeed, these shows find a place with the fans.

As more and more viewers are drawn in, it will be hard to press the cancel button on this Apple TV+ service. With a quality-focused approach, it looks like Apple is doing a lot of things right, and it could evolve into one of the top three streamers one day.

Other services, including iCloud and Apple News, also proved sticky under the Apple One bundle.

It’s Apple’s game subscription service that I think could see its long-term potential reduced. Apple Arcade is a rather confusing service at first glance. It seems to be cannibalizing App Store game sales, and it hasn’t really made a big splash, despite having been around for a few years now.

The real question investors should be asking is where the gaming service sees itself becoming in five to 10 years.

While there are plenty of ad-free mobile games available with the Apple Arcade subscription, it just hasn’t garnered as much attention as Microsoft (MSFT) Xbox Game Pass.

Apple remains in its circle of competence with Apple Arcade for now. In doing so, does he risk closing the door to the broader video game market?

Apple and game streaming?

Mobile games are the fastest growing segment. Still, Apple could use the service to get into cloud gaming, as some of its FAANG peers have already done.

In cloud gaming, Apple would come up against Microsoft, Alphabet (GOOGL), Amazon (AMZN), and even Nvidia (NVDA). Every company has a game streaming platform. Yet, Microsoft is the only company so far that has the vast library of content to make its service a success.

Apple would have to go the exclusive route like it did with Apple TV+ before it made sense to expand Apple Arcade to encompass triple-A titles.

The real reason Apple may have shunned the markets its rivals have entered is that it believes on-device gaming trumps cloud gaming. Without a doubt, the M1 Ultra chip can play like Nvidia’s best GPUs, and the A15 mobile is capable of powering many more.

Still, the A15 might not be ready for the kinds of games the cloud can handle. Given Apple’s incredible low-power chips, I wouldn’t be surprised if Apple comes up with a mobile chip that can run intense console-quality gaming experiences on mobile, while using low power to do so .

A future iteration of the A-series chip, or the inclusion of an M-series chip in an iPhone, could enable incredible gaming experiences without needing to be connected to a high-bandwidth network and low latency.

Given Apple’s chip prowess, I think Apple will avoid cloud gaming for now.

Eventually the hardware will catch up and Apple Arcade could evolve into something more like a Microsoft Game Pass.

The Taking of Wall Street

According to TipRanks, AAPL stocks are a strong buy. Out of 26 analyst ratings, there are 21 buy recommendations and five hold recommendations.

Apple’s average price target is $191.04, implying an upside potential of 20.9%. Analyst price targets range from a low of $161 per share to a high of $215 per share.

Conclusion on Apple shares

For now, Apple Arcade is an intriguing value for mobile gamers. It’s a decent addition to the service set, but it’s not a game-changer (pardon the pun).

However, five years from now, I’m not surprised if more PC-quality triple-A games are included in the Apple Arcade service.

Currently, NBA 2K22 is the closest to a console-quality game on Apple Arcade.

Whether or not this is the first of many game types to land on the service remains to be seen.

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