You’re probably aware that Apple (NASDAQ: AAPL) stands as a giant in the world of technology, a company that dazzles with its sizable profits. However, the path to those profits may not be the one most readily assumed.
Though unquestionably a powerhouse, Apple’s historical comparisons have become more challenging with its sheer magnitude. There are limits to how much business a single entity can capture. Any anticipations of a fiscal deceleration from Apple for the quarter ending in March would have been reasonable.
Against this backdrop, let’s delve into Apple’s profit dispersion in its latest completed quarter. Brace yourself for a revelation: the company’s most lucrative domain is not where it seems.
Revealing Apple’s Unanticipated Profit Mix
While the iPhone remains Apple’s primary revenue source, the demand for this smartphone has hit a plateau.
This saturation reflects a global economy in flux and a market reaching its saturation point. Moreover, consumers are holding onto their iPhones for longer periods, elongating the upgrade cycle. Understandably, these factors may raise concerns among present and prospective Apple investors.
Yet, there’s a twist. While the iPhone contributes significantly to the company’s top line, accounting for just over 50% of the revenue over the past four quarters, the services sector emerges as Apple’s second most lucrative segment, representing about one-fourth of its revenue.
This narrative shifts when we focus on gross profits instead of revenue. Services exhibit markedly superior profit margins compared to products – 72% versus 37%, respectively. The upshot? Services now constitute close to 40% of Apple’s gross profits, surpassing the 40% threshold in the fiscal second quarter ending in March.
Regrettably, Apple doesn’t disclose gross profit specifics for individual products. However, it’s apparent that the iPhone accounts for approximately two-thirds of the total product revenue. Consequently, it’s reasonable to infer that Apple’s services sector now stands as the top profit generator for the tech behemoth.
This profit configuration bolsters the case for holding Apple shares through their turbulence. While product sales and profits have undergone fluctuations beyond the usual lately, with more likely in store, the growth trajectory of Apple’s services gross profits remains impressively steadfast. Predictable profits typically indicate a stock with fewer uncertainties, generally outperforming the market.
The Case for Investing in Apple Stock
This isn’t to suggest that investing in Apple stock is a set-it-and-forget-it scenario. The company faces genuine challenges, including vulnerabilities in China and legal disputes, such as the recent Department of Justice claim of a smartphone market monopoly. Yet, it’s essential to maintain perspective.
Apple’s domain now extends beyond product sales to encompass a significant services segment. It is almost akin to a services entity that coincidentally offers a popular smartphone. Another quarter similar to the latest one should solidify this shift in profitability. As for the regulatory lawsuit, it is a hurdle Apple has navigated before.
Underpinning this optimism is the imminent launch of a new iPhone expected to feature formidable artificial intelligence capabilities. While the direct monetization of Apple’s AI tools remains uncertain, there is little doubt they will stimulate fresh demand for the devices. With more potent iPhones in users’ hands, anticipate further revenue growth from Apple’s highly profitable services business.
Final Thoughts
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As of May 6, 2024, James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple.