Apple's CFO explains the powerful flywheel behind the tech giant's fast-growing, high-margin services segment.
Some investors may be baffled by Apple (AAPL -0.12%) stock's strong performance recently, including a gain of more than 5% over the last week and nearly 39% year to date. They may wonder: Shouldn't the fact that Apple's revenue declined nearly 3% year over year in fiscal 2023 weigh on stock price performance? But there's a strong catalyst bubbling under the surface, keeping the bulls upbeat.
One key part of Apple's business bulls are betting on is none other than its services segment -- a segment consisting of revenue streams that are more consistent, reliable, and predictable than the company's hardware sales. We're talking about Apple's revenue from advertising, AppleCare, cloud services, digital content, and payment services. Together, these high-margin, fast-growing parts of Apple's business are transforming the company.
Here's a closer look at why Apple's services business is such a strong catalyst for the stock.
A loyal user base
You can't talk about Apple's services business without acknowledging its installed base of active devices, numbered in the billions. Though Apple didn't provide an updated figure on exactly how many Apple devices are being actively used around the world, Apple's chief financial officer Luca Maestri did say during the company's fiscal fourth-quarter earnings call that it "continues to grow at a nice pace..." As of the company's last update on its size, Apple said it boasted more than two billion active devices.
This installed base "establishes a solid foundation" for continued expansion of its services business, Maestri said during the company's earnings call.
Broad-based growth drivers for the segment
Highlighting services' incredible momentum, the segment's fiscal Q4 16% year-over-year revenue growth was fueled by growth in every services category and geographic segment. This is "a direct result of the strength of our ecosystem," Maestri explained.
One area of services worth calling out, which management said continued to grow at a strong pace during fiscal Q4, is paid subscriptions.
"We have well over 1 billion paid subscriptions across the services on our platform, nearly double the number we had only three years ago," Maestri noted.
A flywheel effect
Notably, there's a flywheel effect at play for Apple's services business. Increasing content and features for its services segment leads to more engagement, and greater engagement leads to more satisfied customers and ultimately bolsters the total number of active devices. More active devices, of course, means Apple can invest more aggressively in content and features.
Maestri described this flywheel effect during the tech company's fiscal fourth-quarter earnings call.
And really then we step back and we think about why is it that our services business is doing well, and it's because we have an installed base of customers that continues to grow at a very nice pace, and the engagement in our ecosystem continues to grow.
We have more transacting accounts. We have more paid accounts. We have more subscriptions on the platform. And we continue to ... add content and features. We're adding a lot of content on TV+, new games on Apple Arcade, new features, new storage plans for iCloud. So it's the combination of all these things and the fact that the engagement in the ecosystem is improving, and therefore, it benefits every service category.
A high-margin business
But services' strong top-line growth and broad-based underlying momentum is only half of the picture. Investors can't fully appreciate Apple's services business until they realize how lucrative it is. Apple's services gross profit margin in fiscal Q4 was 70.9%. This compares to its average gross profit margin of 36.6% for its hardware. In fact, Apple's strong growth in services, combined with the segment's high gross profit margin, is the main reason the company grew its earnings per share 13% year over year in fiscal Q4 despite revenue falling almost 1%.
Today, Apple's services business accounts for less than a fourth of revenue and 39% of its gross profit. This powerful catalyst, however, looks poised to only become more important to the company over time. Patient and long-term oriented investors, therefore, have a good reason to be bullish on the stock.
Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
FAQs
Key points. Apple's innovation and profitability have made it an exceptional long-term investment. Services segment growth has helped offset stagnating iPhone sales. The company's aggressive stock buybacks are helping support its share price.
Why is Apple the most profitable company? ›
The Bottom Line
Apple is one of the largest and most ubiquitous companies in the world, and its massive annual revenue reflects that. The company's iPhone sales currently dominate its other products, and its various services are growing revenue at a fast pace.
Why are Apple shares tanking? ›
Apple (AAPL) shares fell following the unveiling of the iPhone 16, Apple Watch Series 10 and AirPods 4. Shares of the tech titan's stock were down less than 1% following the much-anticipated "It's Glowtime" event, slipping as the benchmark S&P 500 rose about 1%.
What affects Apple stocks? ›
Increased competition from Android phones could hurt market share and revenue, as well as increasing market penetration of smartphones.
What is the upside potential of Apple stock? ›
Is AAPL Stock a Buy? Apple has a consensus rating of Moderate Buy among 32 Wall Street analysts. There are currently 23 Buy ratings, eight Hold ratings, and one Sell recommendation assigned to the stock. At $249.46, the average Apple stock price target implies upside potential of 15.39%.
Why does Apple sell so well? ›
Strong brand and product design: Apple has a strong brand and reputation for creating high-quality and innovative products that are both functional and aesthetically pleasing. This has helped to create a loyal customer base that is willing to pay a premium price for Apple products.
Who is Apple's biggest competitor? ›
Samsung. Samsung is one of Apple's major competitors in the smartphone market. The company has gained significant popularity and market share with its broad smartphone offerings, innovative features, and strong brand reputation.
Why is Apple so highly valued? ›
The reason behind that—and behind Apple's success—is that its devices are beautiful to look at and a pleasure to use. That's why the company has such a powerful brand and lofty stock valuation. The marketing helps, and the media and fan frenzy never hurt.
What is Apple's number one selling item? ›
In 2021, the iPhone accounted for 46.9% of Apple's revenue, becoming its top-selling product and a major contributor to its revenue stream [2]. This is a testament to the brand's global popularity and the robust demand for its smartphones.
Does Warren Buffett own Apple stock? ›
Warren Buffett speaks during the Berkshire Hathaway Annual Shareholders Meeting in Omaha, Nebraska on May 4, 2024. A coincidence or master plan? Warren Buffett now owns the exact same number of shares of Apple as he does Coca-Cola after slashing the tech holding by half.
Apple has 12.36% upside potential, based on the analysts' average price target. Is AAPL a Buy, Sell or Hold? Apple has a consensus rating of Moderate Buy which is based on 23 buy ratings, 8 hold ratings and 1 sell ratings.
Why is Apple stock in trouble? ›
Apple's List Of Woes. Meanwhile, several issues are weighing on Apple stock including weak iPhone sales in China and the U.S. and legal problems over its App Store policies in Europe. On June 24, European Union regulators accused Apple of violating the EU's Digital Markets Act with its App Store policies.
Is it risky to invest in Apple? ›
Apple's stock is trading at a steep premium
Over the past 10 years, the stock has averaged a much more modest earnings multiple of less than 22. Paying more than 35 times earnings is by no means unheard for growth stocks, but it does, however, leave investors without much of a margin of safety.
Will Apple split in 2024? ›
Apple probably won't split its stock in 2024. The stock price today is about half what it was when the company announced its last split, a four-for-one exchange, in 2020.
Which stock is splitting in 2024? ›
2024 Stock Splits
| Date | Symbol | Company Name |
|---|
| Sep 17, 2024 | DECK | Deckers Outdoor Corp |
| Sep 16, 2024 | ZEPP | Zepp Health Corp |
| Sep 16, 2024 | KSCP | Knightscope Inc |
| Sep 16, 2024 | ISPC | Ispecimen Inc |
87 more rowsIndeed, Apple shares will never get back to $700, says The Economist. The stock has recovered after being "mauled by bears" before, but this time is different.
Why is Apple rallying? ›
(Bloomberg) — Apple Inc.'s (AAPL) upcoming iPhone release has sent its stock price soaring because of promised artificial-intelligence features. Those gains appear vulnerable, at least in the short term, if history is any guide.
Can Apple stock reach $1000? ›
To be or not to be is still a question. While it is theoretically possible for Apple's stock to reach $1000 per share in the future, this would depend on sustained strong financial performance, successful penetration and expansion in new markets, and a favorable economic environment.
