Why Apple Arcade Could Give Services a Jolt

Shares of Apple (AAPL) have been fading lower following the release of its record quarter results. While the numbers themselves were worthy of a rally — even in the face of macro headwinds — the conservative guidance ultimately sent Apple stock retreating. Supply chain issues are still weighing on many firms.

Despite CEO Tim Cook’s knack for dodging and weaving through the worst of supply chain woes, Apple is known to err on the side of caution. It’s far better to set the bar low, with an increased chance of soaring over the mark, than running the risk of a surprising flop, even if it means overshadowing a record quarter.

Indeed, guidance 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; Overly Conservative Outlook?

Looking to the numbers themselves, it was the Mac that had an opportunity to flex its muscles, thanks in part to the release of its powerful new M1, M1 Pro, and M1 Max lines of chips. Services really shined, with 17% in growth.

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

I think she’s right on the money. A continued services push could also propel margins to incredibly attractive new highs.

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 pace, with an Oscar win for best picture now in the bag.

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

Apple Services Growth

Hit shows like Severance and Pachinko have received incredibly high ratings according to RottenTomatoes and IMDb. Indeed, such shows are finding a spot with fans.

As more viewers get drawn in, it will be hard to hit the cancel button on that Apple TV+ service. With a quality-focused approach, it seems like Apple is doing a lot of things right, and it could evolve to become a top-three streamer one day.

Other services, including iCloud and Apple News, have also proven sticky as a part of the Apple One bundle.

It’s Apple’s gaming subscription service that I think may have its long-term potential discounted. Apple Arcade is a rather perplexing service at first glance. It seems to cannibalize App Store game sales, and it hasn’t really made a big dent, despite being around for a few years now.

The real question investors should ask is what the gaming service sees itself becoming five to 10 years down the road.

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

Apple is sticking within its circle of competence with Apple Arcade for now. By doing so, does it risk closing the door on the broader video-gaming market?

Apple and Game-Streaming?

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

In cloud gaming, Apple would clash with Microsoft, Alphabet (GOOGL), Amazon (AMZN), and even Nvidia (NVDA). Each firm has a game-streaming platform. Still, Microsoft is the only firm thus far that has the extensive content library to make its service a success.

Apple would need to go the exclusive route as it has with Apple TV+ before it would make sense to expand Apple Arcade to encompass triple-A titles.

The real reason Apple may have shied away from markets where its rivals have swooped into is that it believes that on-device gaming trumps cloud gaming. Undoubtedly, the M1 Ultra chip can game like Nvidia’s best GPUs, and the mobile A15 is capable of powering so much more.

Still, the A15 may not be ready for the types of games that the cloud can handle. Given Apple’s incredible low-power chips, I would not be surprised if Apple delivers a mobile chip capable of running heavy-duty console-grade 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 allow for incredible gaming experiences without the need to be connected to a high-bandwidth, low-latency network.

Given Apple’s chip prowess, I think Apple will steer clear of cloud gaming for now.

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

Wall Street’s Take

According to TipRanks, AAPL stock comes in as a Strong Buy. Out of 26 analyst ratings, there are 21 Buy recommendations and five Hold recommendations.

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

Bottom Line on Apple Stock

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

However, in five years, count me as unsurprised 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 it’s just the first of many types of games to land on the service remains to be seen.

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