Apple Inc. (AAPL) rolled out an ambitious mobile payment service called Apply Pay about a year ago, to much fanfare.
The service was launched supporting the three major credit and debit card companies — American Express (AXP), MasterCard (MA) and Visa (V) — and was supposed to be much more than just a gimmick or a niche tool for techies. It added Discover Financial Services (DFS) as a partner soon after, too.
AAPL stock isn’t just focused on existing payment processors either. In October, Apple Pay expanded to include direct relationships with coffee king Starbucks (SBUX), retailer Best Buy (BBY) and Brinker International (EAT) restaurant chains, including Chili’s. And according to reports, Apple is taking the service to the next level as it continues to accommodate more banks and merchants worldwide.
The plan is clearly an effort from AAPL stock to use its massive reach via its iPhone platform to tap into the promise of mobile payments.
But will Apple Pay fend off competitors including PayPal (PYPL) and soon-to-IPO Square Inc.?
And even if it does, how much will the mobile payments biz matter to AAPL stock?
Payments Offer No Short-Term Pop for AAPL Stock
The sad reality for investors is that Apple Pay will not move the needle on Apple stock in the near future. That’s because about two thirds of total revenue comes from the all-important iPhone — even the collective might of all services and software can’t hold candle to the might of this smartphone.
Shares of Apple stock are off about 13% from their July highs despite fiscal Q4 earnings showing 22% top-line growth and a nice earnings beat — and that decline is in large part because of fears of a slowdown in iPhone sales.
But looking beyond the here and now, there’s a lot that should encourage investors in AAPL stock.
Click to Enlarge Consider Apple Inc. sold over 220 million iPhones in the last year — making a tremendous pool of potential mobile payments customers, even when you don’t count the older AAPL devices on the market.
And when you layer in other software and service efforts like Apple Music, the prospect of continual revenue from Apple users is pretty substantial.
Yes, the margins aren’t as grand as hardware. But if you can get a few bucks each month from each user, that will add up to real money in a hurry.
Apple Pay is perhaps the most attractive of any of these services because of the regular fees from banking transactions. Even a fraction of a penny per swipe could add up to big bucks for Apple stock holders, and would provide a very nice baseline of revenue to help keep the company moving.
Bottom Line on Apple Pay
AAPL stock is entrenched, that’s for sure, but even tech companies can lose their edge. Look at Microsoft (MSFT) or, even worse, BlackBerry (BBRY) for proof of once-dominant tech stocks that lost their luster.
Apple needs to figure out what comes next, and it can’t keep relying on the iPhone forever.
Branching out into software and services is the right move for the long-term — and picking mobile payments as the key battleground makes a lot of sense right now.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
