One of the main reasons Apple (NASDAQ:AAPL) stock has won over the market recently is its fast-growing services segment. With the high-margin business growing as a percentage of total revenue, Apple is becoming less dependent on hardware — revenue that has a lower margin and is more volatile than services.
To put into context how big Apple’s services business has become, it could see revenue greater than $53 billion if it kept up last year’s 16% growth rate — an outcome that represents a reasonable forecast based on services’ accelerated growth in the final quarter of fiscal 2019.
Here’s a closer look at the import segment’s momentum.
Strong growth in services
Apple’s services revenue in fiscal 2019 was $46.3 billion — up from $39.8 billion in fiscal 2018. This segment fared much better than Apple’s products revenue, which was dragged down by a slump in iPhone sales. Total products revenue fell from $226 billion in fiscal 2018 to $214 billion in fiscal 2019.
Key drivers for services recently included record revenue in the App Store, AppleCare, Music, cloud services, and App Store search ad business, management noted in Apple’s most recent earnings call.
The robust year for services came amid an invigorated effort from management to further monetize its installed base of active devices. The tech company announced four new services in March, 2019, including Apple News+, Apple Card, Apple Arcade, and Apple TV+. But the impact of these new services will probably have a more meaningful impact on results in fiscal 2020 than they did in fiscal 2019. Apple News+, the company’s subscription-based news and magazine service, launched about halfway into the fiscal year, Apple’s credit card launched in August, and Apple Arcade was only available the last few weeks of the fiscal year. The company’s streaming-TV service, Apple TV+, didn’t come to market until November — after fiscal 2019 was over.
With strong, broad-based momentum across its services business and recent launches of new services, Apple is easily on track to hit a target management set out several years ago to double 2016 services revenue, which was about $24.4 billion, by fiscal 2020. Indeed, at this point, Apple’s target fiscal 2020 services revenue target is no longer looking ambitious.
A key catalyst
Services now accounts for 18% of total annual revenue — up from 15% of revenue in fiscal 2018. Furthermore, it’s the company’s second-largest segment. Apple’s third-largest segment in fiscal 2019 was Mac, coming in at $25.7 billion in revenue. With Apple’s fast-growing services business representing such a large portion of revenue, it will probably give consolidated results a nice boost in fiscal 2020.
Of course, services has a long way to go to catch up to iPhone, which brought in $142 billion in revenue in fiscal 2019. But with services revenue growing at double-digit rates and iPhone revenue declining in recent quarters, the gap between these two segments is likely to narrow further in fiscal 2020.