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AAPL Stock Really Needs Apple Music to Work … Or Else

Apple Inc. (AAPL) is, essentially, the iPhone. There are plenty of other decent products from the consumer technology giant, sure, but the Apple iPhone is the biggest driver of revenue for AAPL stock.

Specifically, as of Apple earnings in July, the iPhone tallied 63% of total revenue and we can expect a similar number again when Apple reports its fiscal Q4 numbers next week. The next largest segment was its Mac computers, totaling about 12% of Apple sales.

AAPL Stock Really Needs Apple Music to Work ... Or Else

But when you dig deeper into the individual segments of Apple Inc., it’s interesting to see the continued growth of segments beyond hardware. For instance, AAPL stock reported that its “services” segment — which includes iTunes, Apple Pay and other services — is catching up to Macs at a 10%-plus share of total revenue.

In fact, services are generating more in raw sales than the Apple iPad does each quarter.

This is ultimately a good thing for AAPL stock, because it diversifies the tech giant away from its dependency on the upgrade cycle — particularly with the Apple iPhone. But the sad reality is that if upcoming Apple earnings show weakness in China, as I predicted they would a few weeks ago, there has to be a bright spot in the near future for investors to hang on to.

Apple Music could be it, recently reporting over 15 million users, with roughly 6.5 million of those as monthly subscribers at $9.99 a pop.

It’s important that this streaming service keeps up this momentum … because if not, AAPL stock doesn’t have much else to hang its hat on.

AAPL Stock Faces Rough Comps in 2016

The iPhone 6 launch a year ago was a huge success, and resulted in a great run for AAPL stock … at least from October 2014 through July of this year, when Apple Inc. added over 30% vs. just 5% for the S&P 500 in the same period.

But the larger iPhone tapped into big pent-up demand for increased screen size, and the iPhone 6S is highly unlikely to cash in the same way. Not only is that troublesome in the most recent Apple earnings report that’s scheduled for Oct. 27, but it’s also a problem for the next quarter or two as year-over-year comps will stay difficult for some time.

A bright spot for investors would be the growth of software and service sales — not just because of the needed revenue for AAPL stock, but also because it would be proof that Apple Inc. is moving toward a significant regular revenue stream outside hardware. After all, once everyone has their hardware, they still need to purchase video game apps in the iTunes store or listen to ad-supported Apple Music.

While the $65 million Apple takes in via Apple Music (that’s $9.99 x 6.5 million subs) is a drop in the bucket of this company and still lagging far behind rivals like Spotify and Pandora (P), it’s a crucial product because it represents the hopes for regular revenue that isn’t reliant on a product cycle.

It’s also important to acknowledge that Apple has put a lot of effort into this service, and some reports indicate that the initial pop of Apple Music is fading. If the service founders, it could illustrate the serious problem that Apple faces serious challenges in using its hardware scale to roll out new products and services like this.

All eyes will be on AAPL stock in the coming weeks as we learn more about Apple earnings and China iPhone sales. But while the Apple Music share of revenue is small, the service could be a proxy for the future of AAPL stock.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/aapl-stock-apple-music-earnings/.

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