A top Apple analyst ponders whether there's another 'shoe to drop' for the stock

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Though Apple has trumpeted its services segment as a potential hedge against slowing iPhone sales, one of the top analysts believes the company is facing a growing revolt against the transaction fees it charges for apps.

"While the services segment grew 18 percent in the December quarter, we've now started to get investor questions worrying about whether the App Store will be the next shoe to drop," AB Bernstein's Toni Sacconaghi wrote in a note Friday. "Certainly, the headlines in the last few months haven't been encouraging. Netflix, Spotify, and Fortnite have all stopped / threatened to stop paying the so-called 'Apple Tax' of 15 to 30 percent on App Store revenues."

As sales of the company's popular smartphone decelerate, Apple management has doubled down on its services unit — which includes the App Store, Apple Music subscriptions, Apple Pay and iCloud storage — as its next revenue generator.

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As part of that regular Services revenue, Apple charges between 15 percent and 30 percent of monthly subscriptions for customers who buy software via the iOS App Store, a fee that's come to be known as the "Apple Tax." Any time a a user buys an iOS app, a digital item within an iOS app (e.g., an ebook) or initiates a subscription within an iOS app (e.g., a New York Times subscription), Apple takes a 30 percent cut for the first year and 15 percent for all subsequent years.

Such a "tax" poses a significant burden to companies like Netflix and Spotify, which have developed work-arounds to dodge the added fees.

"Unsurprisingly, this 30 percent cut has transformed the App Store into the largest single driver of Apple Services, accounting for about 40 percent of all Services growth in the last three years by our estimates," added Sacconaghi, a five-star rated analyst on TipRanks, a analyst review service. "In recent years, however, discontent over this 'Apple tax' has been brewing among several major iOS app developers."

Sacconaghi's stock picks average a 23 percent one-year return, according to, making him among the best tech analysts. The analyst has a market perform rating on Apple shares, which were up slightly before the opening bell on Friday.

Following music streaming provider Spotify, Netflix has also moved to stop new users from signing up via iOS, first within specific international markets and then globally. That move "is when investor concerns really came to a head," Sacconaghi wrote, especially since Netflix was widely reported to be the single highest-grossing app within the App Store in 2018.

While his clients are concerned, Sacconaghi does not believe this should be a top worry.

"We are not concerned - at all - about potential disintermediation of the App Store," he wrote. Instead the analyst is worried about the iPhone and believes estimates for sale of the smart phone may need to come down more.

Apple stock is down more than 13 percent over the past 12 months and down more than 27 percent in the past three. Much of that decline has followed the company's decision to no longer break out individual sales numbers for the iPhone, iPad and Mac, a statistic analysts and investors for years used as a proxy for Apple's financial health.

Instead, CEO Tim Cook has placed his bets on the Services business, which reported revenues of $9.98 billion in the fourth quarter.

"When we look at our services business, we think about the fact that we have a very large and growing installed base," CEO Tim Cook said on the company's earnings call. "The installed base of all our major product categories is at an all-time high and has been growing over the last several quarters, so the opportunity for us to monetize our services business continues to grow over time."

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Still, Apple is unlikely to be hurt much by the loss of Netflix, which as the company's single largest developer, represented "less than 0.3 percent of total services revenue" in 2018, according to Apple Chief Financial Officer Luca Maestri. What concerns Sacconaghi in the long term, though, is an ongoing lawsuit at the Supreme Court whether the "Apple Tax" meets the definition of a monopoly that has overcharged customers for apps.

While the current case before the high court does not actually address the issue of whether the App Store violates antitrust law (instead, the deliberation is just determining whether the plaintiffs even have the standing to sue in the first place), if the Supreme Court rules against Apple, it means that the actual case "has only just begun," Sacconaghi wrote.

(Update: This story and headline has been updated to reflect that the iPhone is the analyst's top concern, not services.)