iPhone sales might be down for Apple (NASDAQ: AAPL) amid the coronavirus pandemic, but Apple users are spending a lot more in the App Store while staying indoors. App Store sales climbed 35% in the first two months of Apple's third quarter, Morgan Stanley analyst Katy Huberty estimates. Importantly, growth accelerated from April to May, even as economies started to reopen.
"High levels of engagement have sustained as the 'new normal' (at least in the near-to-medium-term) includes more time spent indoors, which should remain a tailwind to App Store performance," Huberty wrote in a note to investors.
Overall, Huberty expects strong App Store sales to lead to a 16.7% increase in services revenue for Apple versus the 12% she previously modeled. That's over $500 million in additional revenue. Considering that the App Store is one of Apple's highest margin services, that revenue will likely produce a profit margin well above Apple's average services gross margin of about 65%.