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Sangara Narayanan
Sangara Narayanan
Articles (502) 

Services Segment Already a Game Changer for Apple

Contribution to overall revenue has hit 16% and looks good to breach 20% in the next few years

August 11, 2017 | About:

In a span of three years, Apple Services revenue has moved from being the fourth-biggest earner to second best for the Cupertino, California, smartphone giant.

Services revenue has now grown from $4.485 billion during the third quarter of 2014 to $7.266 billion during the third quarter of 2017, representing growth of 62%. Services remains the fastest-growing segment for Apple (NASDAQ:AAPL), and if it keeps getting bigger and bigger it could easily become a key future revenue driver for Apple for the long term.

During the third quarter of 2014, Apple Services accounted for 11.9% of total revenues. Three years later, it accounts for 16% during the most recent quarter. If you look at the absolute dollar numbers, the impact of services in Apple’s growth looks even more remarkable.

Between 2014 and 2017, Apple’s third-quarter revenue increased from $37.432 billion to $45.408 billion, an increase of $7.976 billion. During this period, Apple Services revenue increased from $4.485 billion to $7.266 billion, an increase of $2.781 billion. Apple Services contributed for 35%, or more than one-third of Apple’s growth during this period.

Although iPhone sales have picked up some speed this year compared to last year, the growth is still in low single digits. Considering the state of the global smartphone market, it will be very difficult for Apple to grow its smartphone sales in a sustained and steady manner over the next several years. Just take the U.S., for example. Smartphone penetration in the U.S. has gone from under 10% in 2008 to above 80% this year. There are simply not enough new hands available into which Apple can push its iPhone.

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The bulk of Apple’s revenue is still accounted for by iPhones, contributing nearly 54% of total revenue during the third quarter. This is where Apple Services is already changing the game for the company. In the last three years, Services has grown from contributing 10% of total revenue to nearly 16%, and it’s looking good to hit the 20% level in the next few years, thereby slowly decreasing the impact of iPhone sales on Apple’s growth.

Every quarter from here that Apple Services grows at double-digit rates while iPhone sales grow in low single-digit to negative rates, the more its contribution to overall revenues. In short, it will help the company have diversified revenue streams instead of being dependent on device sales all the time.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

About the author:

Sangara Narayanan
Sangara Narayanan holds an MBA from Kent State University, Ohio, and has worked on the floor as a trader in New York. You know where. He is passionate about capital markets and specializes in business analysis, stock valuations and making chicken curry

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