According to Apple Insider, investment bank Morgan Stanley analysts said that slowing App Store growth in May could pose a risk to Apple’s services revenue in the June quarter.
In a note to investors, Morgan Stanley chief analyst Katy Huberty offered her take on Sensor Tower’s new estimates, which show that App Store net revenue growth fell year-over-year in May.
According to Sensor Tower estimates, Huberty sees App Store revenue growth slowing to 4% year-over-year in May, down from 8% year-over-year growth in April.
Despite weaker performance across the board, China was one of the main drivers of weakness. Net income growth in the region fell 8 percentage points sequentially, and was only 3 percent year-over-year.
Huberty believes the strong growth in April was driven by the new coronavirus lockdowns in China, while the deceleration in May represents a slowdown in demand for new apps and services as the region slowly reopens.
By category, only 2 of the 10 largest App Store categories experienced an acceleration in net revenue growth in May. Gaming was the largest App Store segment with 60% revenue share, down 5 percentage points from April and down 1% year over year.
In the quarter ended in May, App Store net revenue rose 6% from a year earlier. With the App Store having a tougher June, Huberty sees downside to her forecast of a 15% year-over-year revenue increase for the June quarter now.
“While we believe Apple’s user spending has been more resilient through all phases of the economic cycle, placing Apple in a better position than other consumer hardware peers, slower App Store growth could indicate that consumers are spending more on goods/services. The decline accelerated during the epidemic,” she wrote.
However, Huberty remains bullish on the long-term growth of the App Store and Services. She added that the slowdown in May may just be indicative of near-term headwinds. Analysts believe growth will accelerate again after the June quarter.
Huberty maintained a 12-month Apple price target of $195. The target is based on an implied price-to-earnings ratio of 30.3 times, with an EPS estimate of $6.43 in 2023.