With the iPhone still responsible for the bulk of Apple’s quarterly revenue, it’s easy to overlook the company’s burgeoning services division, a category which includes iTunes, the App Store, Apple Pay, Apple Music and more. During Apple’s most recent quarter, the company’s suite of services generated $9.1 billion in revenue, representing an impressive 31% increase year-over-year. Looking ahead, Apple’s range of services will only become more important to Apple’s bottom line. Especially as iPhone upgrade cycles become more drawn out, services like Apple Music help the company generate more revenue per user over the lifetime of every device sold.
To this point, Morgan Stanley analyst Katy Huberty is out with a new research note that takes an extremely optimistic view of Apple’s services-related business. Specifically, Huberty believes that Apple’s collection of services will account for upwards of 67% of the company’s revenue growth over the next five years. Huberty’s analysis is certainly worth exploring, especially in light of recent remarks from Nomura Instinet analyst Jeffrey Kvaal who argues that the optimism surrounding Apple services is a bit overblown.
Huberty begins by taking a look at the App Store. Though the App Store as a revenue generating service tends to fly under the radar, there’s no question that the app economy is still booming. This past January, for example, Apple issued a press release indicating that the 2017 holiday season was record-breaking and saw more than $300 million of purchases on New Years Day alone.
“During the week starting on Christmas Eve,” Apple said, “a record number of customers made purchases or downloaded apps from the App Store, spending over $890 million in that seven-day period.”
In light of this, it’s no surprise that Huberty doesn’t see App Store growth slowing down anytime soon. Specifically, Huberty notes that the App Store represents a $40 billion business with the capability of exhibiting annual revenue growth of 26% over the next three years.
All told, Huberty articulates that the Apple of today is markedly different from the Apple of even a few years ago.
[Apple’s] Services business accounts for rough 15% of revenue and 22% of gross profit dollars this year vs. 9% of revenue and 10% of gross profit dollars just five years ago. By FY22, we believe Services will account for 27% of Apple revenue and just under 40% of gross profit dollars.
As far as Apple shares are concerned, Huberty lays out three scenarios. In a bull case scenario, Huberty believes Apple shares can hit $300. In a bear case scenario, Huberty anticipates shares could dip down to $134. In a base case scenario, Huberty sees Apple’s stock price hitting $214.