How Services Will Become Apple's Next $100 Billion Business

There has been no greater growth story in the history of American business than Apple Inc. (NASDAQ: AAPL). Others may have outperformed Apple stock, but Apple’s roughly $1.4 trillion market capitalization is the largest in America, and it is still the world’s largest company measured by the free float of its shares. What seems hard to fathom, considering the meteoric rise in its shares, was that Apple’s $260.2 billion in fiscal 2019 was actually about $5 billion lower than in fiscal 2018. The growth of the iPhone and related products is on and off, but Apple’s online services is currently a great area of future growth that has attracted new investors.

With Apple’s services having grown by about 20% on an annual average over the past five years, some investors have to be wondering just how big the company can grow its services. One consideration is that roughly 60% of its total revenues are now coming from outside of the United States. In the last quarter alone, Apple posted $12.5 billion from services (versus a $64 billion total), and $46.3 billion (versus a $260.2 billion total) was attributed to annual revenues from services.

If Apple can keep its services offerings coming on strong, via more app sales, more streaming music subscriptions, and growing its Apple TV streaming offering, then it only takes a few more years of 20% revenue growth for this segment to be Apple’s next $100 billion business.

Before discounting the value of the services businesses combined, note that Apple’s cost of sales of almost $16.8 billion in 2019 was just 36% of the $46.3 billion in revenues. Apple’s cost of sales on products and hardware was a vastly higher 65.6% level.

A report on January 22 from Evercore ISI indicated that Apple’s services revenue could hit the $100 billion mark by 2024. With a growing number of iPhones and other devices in the Apple ecosystem, and with more dollars being spent on this by consumers, Apple’s revenue per user will rise just from the laws of larger numbers, on top of innovation and new offerings.

Evercore ISI’s Amit Daryanani called Apple’s services revenues an underappreciated growth driver, despite the move toward more subscription models in society. For 19% or 20% growth to remain, Apple’s music would grow 32% and Apple Pay would grow about 41%. The Arcade and TV+ are also projected to land between 80 million and 90 million subscribers over this 2024 lookout. That $100 billion goal would come to services accounting for 30% of total revenues and 45% of its gross profits.

On January 15, Canaccord Genuity raised its Apple target price to $355 from $275, and services were one driving force. Michael Walkley, the firm’s analyst, said:

We believe Apple’s ecosystem approach, including an installed base that exceeds 1.4 billion devices globally, is leading to record services revenue, and we expect the higher- margin services revenue growth to continue outpacing total company growth. We are also encouraged by the strong demand for the iPhone 11 lineup and believe Apple will maintain its market share leadership of premium-tier smartphones that could be bolstered by a 5G upgrade cycle. Further, Apple has market share leading positions in wearables with Watch and AirPods, and both have strong sales and growth momentum.

Daniel Ives of Wedbush Securities has been incredibly bullish on Apple, and with a formal $350 target price, Ives said on January 13 that the fundamentals actually may support even a $400 share price ahead. His view is that there has been a metamorphosis-like valuation rerating by the investing community around the company’s more than $50 billion annual services revenue. Ives said:

The services business we assign a $500 billion to $650 billion valuation range given the increasingly importance of this key revenue stream that is getting a new appreciation by investors as Cook & Co. further monetize its golden jewel installed base of what we estimate is currently 925 million iPhones worldwide.

Apple stock seems to rise two to three times the number of trading days that it falls or is relatively unchanged. Like a number of top tech stocks, Apple has seen many analyst upgrades and target price hikes so far in 2020, and its shares have peaked so far at roughly $319.00. That is up over 13% in the past month alone and up closer to 35% over the past 90 days.