Apple’s growing service business

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.

trend 3


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.


pie chart 2


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