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Apple: not as good as expected. Morgan Stanley: Growth in the App Store in May is a Headwind for June Quarter Results

Morgan Stanley analyst Keith Weiss noticed that Apple’s (NASDAQ:AAPL) App Store’s net revenue growth slowed down in May.

In May, growth fell to +4% Y/Y because all regions except the US slowed down, except for the US. In April, the App Store had a year-over-year growth of 8%.

Weiss said that the App Store’s results in May were “worse than expected.”

“One of the main reasons why the App Store was weak in May was China, which makes up 26% of the total T12M spent in the App Store. Even though the Y/Y comparison was easier by 3 points in May, the App Store’s net sales growth in China slowed by 8 points M/M to just 3% Y/Y. We think this means that April’s results (+11% Y/Y) were probably helped by COVID lockdowns in major cities, while May’s results show that demand slowed down as some areas slowly reopened. New video game licence approvals may have also helped the App Store’s performance in China in April. “China gaming net revenue growth slowed by 8 points M/M in May to +6% Y/Y,” Weiss wrote in a client note.

Only two categories saw their new revenue growth sped up in May. The largest sector, gaming, saw its growth slow by 5 points from April.

Overall, the analyst thinks that MS’s App Store forecast for the June quarter, which is +15 percent Y/Y, could be wrong.

“We think Apple user spending is more stable throughout the economic cycle, which makes Apple better than other consumer hardware companies.” However, a slowdown in the growth of the App Store is likely a sign that consumers are spending less on goods and services that they bought more of during the pandemic.Weiss said. “We are optimistic about the long-term outlook for the App Store and services, but a slowdown in App Store growth (and revenue) could hurt results in the short term.”

Still, Weiss thinks that growth in the App Store can get back to more healthy levels after the June quarter.

“As we head into the summer months, the health of consumers and how their spending habits might change are key topics of discussion,” the analyst said. “An acceleration in App Store growth could help to dispel the bear fear of a more permanent App Store slowdown.”

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