Why the Long-Term Case for Apple Inc. Depends on Services Revenue

Apple Inc. (NASDAQ:AAPL) delivered its Q4 earnings results and blew past expectations for both earnings and revenue. And as you might expect, AAPL stock is up. Sales increased across the board, with all the company’s divisions posting year-over-year gains. But once again, Services revenue stood out.

Why the Long-Term Case for Apple Inc. Depends on Services Revenue

Source: Apple

Apple’s third largest division delivered blistering revenue growth that made the iPhone’s 2% year-over-year increase look paltry in comparison.

The key to the phenomenal growth of AAPL stock over the past decade is the iPhone. And in the Q4 Apple earnings report, it was clear that the iPhone remains the company’s single most important product. With 46.7 million iPhones sold during the quarter, the iPhone division brought in $24.8 billion in revenue. That’s nearly 55% of Apple’s total.

Services Revenue Is Important to AAPL Stock

Despite the impressive showing, which crushed analyst expectations and led to a 1.8% boost in AAPL stock after the bell on Thursday, iPhone revenue was up just 2% year-over-year.

Apple’s Services revenue, on the other hand, was up 34%, continuing a winning streak that’s turned it into the company’s third largest division. Services accounted for 16.2% of overall AAPL revenue. The Other Products category (which includes the Apple Watch, Apple TV, Beats headphones, iPod Touch and accessories) actually notched even better growth at 36%, but it’s a distant fifth in the Apple divisional revenue hierarchy.

In fact, in this quarter’s Apple earnings, Services brought in more revenue than Other Products and iPad sales combined. The big revenue gains posted by Apple Services this quarter aren’t a one-off. In Q3, they were up 22%. In Q1, they were up 18% as Services posted the strongest year-over-year growth of all Apple divisions.

That consistent growth is why Services revenue is an increasingly important factor in the performance of AAPL stock.

Apple Services Key to Long-Term Growth

The smartphone market is maturing and Apple is locked into a yearly release cycle. That means iPhone sales spike after the release of a new model, then slow for the remainder of the year, dropping to a low point in the quarter leading up to a new release.

At the same time, the overall smartphone market growth is slowing (it’s expected to grow just 4.2% in 2017) and there is increased competition in the flagship space where the iPhone is so successful. Chinese manufacturers like Huawei are making gains, and now Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is all in with its Google Pixel phones.

In other words, AAPL stock benefits from another product to replace slowing iPhone sales and to help even out quarterly revenue. That “product” is Services, which is made up of things like iTunes revenue, App Store sales, Apple Music subscriptions, Apple Pay, iCloud, licensing revenue and AppleCare.

Having over 1 billion Apple products in use worldwide makes that Services revenue hum. By controlling the operating system of its devices, Apple is able to position its Services front and center on every iPhone, Mac, Apple Watch and iPad sold. As Apple continues to expand its Services offerings and continues to sell hardware — even if those iPhones, iPads and Macs don’t see the kind of growth they once did — Services revenue continues to rise at an impressive pace.

People subscribe to Apple Music or use Apple Pay regardless of whether they bought their iPhone this year, or two years ago.

Of course, Apple Services faces competition, too. Everyone is getting into mobile payments and all the big tech companies are pushing streaming music services, except Microsoft Corporation (NASDAQ:MSFT), which recently threw in the towel on its Groove Music.

But if Apple Services can continue to be competitive (and at least be the best choice for owners of Apple hardware), then you can expect Services revenue to continue posting impressive growth, and continue to become an increasingly important factor in AAPL stock valuation.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/11/apple-inc-aapl-stock-depends-on-services-revenue/.

©2021 InvestorPlace Media, LLC