Apple (NASDAQ:AAPL) stock already has its next big growth driver for the next decade – services. While some believe Apple desperately needs to find the “next iPhone” to power future growth, the tech giant is quietly building a services empire underneath the hardware layer that will drive substantial growth and margin expansion for years.

Thus, Apple now has an installed base of over 2.2 billion active devices globally, representing a massive addressable market to sell incremental services like Apple Music, iCloud, Apple TV+, Apple Arcade, and more. As CEO Tim Cook stated, “We are pleased to announce that our installed base of active devices has now surpassed 2.2 billion, reaching an all-time high across all products and geographic segments.”

This foundation allows Apple to tap into recurring subscription revenue from users locked into its ecosystem. Moreover, the company’s services segment delivered a whopping 70.8% gross margin for Apple in fiscal 2023 compared to just 44.1% in its product business.

So, between its unrivaled installed base and high-margin services segment, Apple stock has its next decade of growth already solidified through services. AI and new technologies will only augment this trajectory. For long-term investors, Apple remains a compelling core holding thanks to the overlooked services narrative underneath the hardware innovation.

Massive Installed Base Feeds High Margin Services Business

The massive moat of 2.2 billion active devices represents a captive audience for Apple to sell incremental services. As Apple states in its fiscal Q2 2024 earnings release, services revenue hit a new all-time high of $23.9 billion, up 14% year-over-year.

Driving this services momentum is the recurring nature of subscriptions across Apple Music, iCloud, Apple TV+, Apple Arcade and more. Once a user is locked into Apple’s ecosystem, they tend to keep paying for these add-on services over time.

Additionally, the services segment delivers a substantially higher profit margin than Apple’s hardware sales. For fiscal 2023, Apple’s services gross margin hit 70.8% compared to just 44.1% for products. So as services grow as a percentage of total sales, Apple’s profit margins have room for meaningful expansion over the next decade.

Consequently, Apple’s unrivaled installed base sets the foundation for services to drive strong double-digit growth for years to come. And the high-margin profile will drop a greater percentage of incremental revenue to the bottom line. The services narrative will power earnings per share growth even if hardware innovation stalls.

AI Partnership Accelerates Lucrative Advertising Opportunity

Apple is leaning into AI, announcing an integration with ChatGPT across iOS, iPadOS, and macOS. This allows Apple users to access ChatGPT capabilities natively without toggling between applications.

One key beneficiary of AI will be the acceleration of Apple’s advertising segment. As Needham analysts note, Apple’s global ad business could generate over $10 billion in 2024 revenue growing at 21% annually – twice Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) pace.

The high-margin advertising business presents substantial upside. Bringing ads to Apple TV+ alone could double company growth rates next year per analysts.

This prediction is playing out with Apple’s latest move. The company tapped ad tech firm Taboola (NASDAQ:TBLA) to power native ads across Apple News and Apple Stocks. As Taboola’s CEO states, Apple recognizes that growing ads requires a serious sales operation.

Apple also aims to enhance App Store ads with AI-powered buying tools. Therefore, AI stands to boost Apple’s already fast-growing advertising unit. The segment’s high margins should disproportionately benefit the bottom line thanks to operating leverage. Investors buying today will win as services revenue comprising ads and subscriptions continues gaining share in Apple’s financial mix.

Bottom Line: Don’t Overpay For Apple’s Services Growth Story

Apple’s services narrative provides a visible growth engine for the next decade thanks to an installed hardware base of over 2 billion strong. With high margins north of 70%, increasing the mix of services will lift Apple’s overall profitability over time.

However, today’s valuation leaves little room for error. Apple trades at a price-toearnings ratio of 35x based on a share price of $218. The stock would need to fall to around $155 to reach fair value.

Apple remains a core portfolio holding for long-term investors given its entrenched hardware positioning and services upside. However, growth stocks like Apple tend to overshoot reality on both the upside and downside.

Wait for the next inevitable broad market correction, likely tied to rising recession fears. Should Apple stock fall below $155 on macroeconomic concerns unrelated to its fundamentals, view that pullback as a gift to start building a starter position.

Stay tuned for Apple’s fiscal third-quarter earnings on August 1 as the next catalyst. Any positive momentum in the services segment in the report would underscore the long-term thesis that is detailed today.

On the date of publication, Andrea van Schalkwyk held long positions in AAPL, and GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor held a LONG position in AAPL.