For some time now, I have been anticipating the acceleration of Apple’s service business. I think with yesterday’s earnings call put the emphasis on this.
quote : Apple’s services category brought in $9.19 billion in revenue in the second quarter. That’s an impressive 31 percent increase over $7.04 billion in the year-ago quarter.
In the graph below you can clearly see the trend accelerating ( in yellow): this is important because service revenue has higher margins & is more predictable that iPhone unit sales as you can see below in red.
Out of 1.3 Billions users, Apple has only converted 270 millions people into Apple music monthly subscriptions for example. So there is still a lot of potential going forward.
Coupled with a 100 billions $ buyback program & free cash flow generation of around 50 billions a year, you can understand why the share price has potential to go higher.
A multiple expansion in my opinion should also be in the medium term. Services are about 15% of total revenue now, if it reaches 25% -30% in the coming years this would definitely be compatible with current p/e ratio of around 17. The iPhone component of this pie chart was at around 70% fairly recently, so clearly the shift has began to a more stable business with higher margins.