Lion's share of Apple's revenue expansion after 'iPhone 8' expected from services growth

Posted:
in AAPL Investors
Given the Apple iPhone user base expansion, Apple's Services business led by the App Store is forecast to not only be the prime mover of Apple's income expansion, but also be the largest contributor to gross margin improvements as well.




Ben Schachter from Macquarie Research sees about 75 percent of total Apple gross profit through fiscal year 2021 coming from services. Gross margin gleaned on the App Store is estimated to be about 90 percent, AppleCare at 70 percent, and all other services including iTunes, iCloud, Apple Pay sitting at 64 percent.

Services revenue is expected to grow 17 percent per year through 2021, hardware revenue will climb 2.4 percent, with a continuation of about 30 percent annual growth in Apple's App Stores per year. Driving the expansion is subscription service growth, even with a lower percentage of those payments going to Apple.

"The App Store is one of the best business models ever created," Schachter said in a note to investors, a copy of which was provided to AppleInsider. "Apple investors need not rely on Apple for all the innovation to drive the model forward. If someone creates a game in their parents' garage in Taipei or if GE revolutionizes health care with an app, Apple can benefit."

Schachter believes that the value of the services revenue is not given enough weight by analysts, as Apple reports App Store revenue on a net basis, rather than a gross basis like it does for other products.

The prediction model that puts Services at the top of Apple's revenue drivers assumes limited hardware growth after the "iPhone 8" release, and no significant new businesses such as a large expansion into subscription video -- which Schachter believes is possible.

Apple's Chief Executive Tim Cook may agree with Schachter's predictions. During July 2016's earnings conference call, Cook said that Apple's Services business is expected to be the size of a Fortune 100 company at some point in 2017.

As a result, Schachter has raised the Apple share price target to $148 from $133, and earnings per share to $9.10.

Earlier in January, Apple heralded a year that saw $20 billion paid out to developers in 2016 alone. According to Apple, the App Store's subscription billings grew significantly in 2016 to $2.7 billion, up 74 percent from 2015.

Apple's rumored "iPhone 8" is said to feature next-generation technology like an OLED "wraparound" screen with Touch ID home button and other sensors embedded behind the glass. Recent rumblings out of Apple's East Asian supply chain suggest the device will ditch aluminum for forged stainless steel as part of a "glass sandwich" design reminiscent of the iPhone 4 series.

Comments

  • Reply 1 of 13
    schlackschlack Posts: 673member
    Def see services as the future growth...but those margins seem a bit inflated. AppleCare is often bought at 30%+ discount from authorized vendors. App Store stuff is often bought with gift cards bought for 15% off via Paypal, eBay and other third party vendors.
  • Reply 2 of 13
    blastdoorblastdoor Posts: 1,875member
    I think transportation-as-a-service is eventually going to be a big deal, too, though it's pretty hard to discern how Apple will participate in that. I had imagined that project Titan would result in Apple-designed, owned, and operated self-driving electric cars that could be summoned from an iPhone. The rumor mill makes it sound like Apple's efforts to do their own car might not be working out, but it's hard to tell what is working out. 

    Perhaps Apple will end up having a built-in transportation app on the iPhone home screen that allows users to hail a self-driving car from a variety of partners. It could be kind of cool to open up the Transportation app and decide that today I'd like to be driven to work by a Tesla, tomorrow a Mustang. 

    But anyway... however it plays out, I'm sure Apple will try to participate in the transporation-as-a-service market, and that market will be huge. 
    cali
  • Reply 3 of 13
    mtbnutmtbnut Posts: 189member
    I wish they had added "and cloud performance improvements" to that headline. Apple should just buy Google. In the time it takes me to launch iCloud Mail, I've already launched, read, and replied to 10 emails in Gmail. 
    edited January 2017 brucemc
  • Reply 4 of 13
    canukstormcanukstorm Posts: 1,545member
    sog35 said:
    Services, Services, Services, Services.

    Though I doubt 75% of Apple's gross profit will be from Services by 2021.  I'd say about 30-40% is more realistic.

    Services is the sleeping Giant the entire investment community is ignoring.

    As far as iPhone growth. I don't believe iPhone8 will mark the end of growth. These are the same assholes who said iPhone6 would end iPhone growth.
    "Services is the sleeping Giant the entire investment community is ignoring."

    That's because the consensus (or perception) is that Apple is shit when it comes to services / cloud / AI / ML or anything cloud related. This article represents a growing sentiment I've noticed more than ever this year. 

    https://medium.com/adventures-in-consumer-technology/apple-inc-a-pre-mortem-568d1a0b7d72#.5xnea5um1
  • Reply 5 of 13
    sog35 said:
    Services, Services, Services, Services.

    Though I doubt 75% of Apple's gross profit will be from Services by 2021.  I'd say about 30-40% is more realistic.

    Services is the sleeping Giant the entire investment community is ignoring.

    As far as iPhone growth. I don't believe iPhone8 will mark the end of growth. These are the same assholes who said iPhone6 would end iPhone growth.
    "Services is the sleeping Giant the entire investment community is ignoring."

    That's because the consensus (or perception) is that Apple is shit when it comes to services / cloud / AI / ML or anything cloud related. This article represents a growing sentiment I've noticed more than ever this year. 

    https://medium.com/adventures-in-consumer-technology/apple-inc-a-pre-mortem-568d1a0b7d72#.5xnea5um1

    Maybe you should take a job at apple and fix everything.
    watto_cobra
  • Reply 6 of 13
    canukstormcanukstorm Posts: 1,545member
    sog35 said:
    Services, Services, Services, Services.

    Though I doubt 75% of Apple's gross profit will be from Services by 2021.  I'd say about 30-40% is more realistic.

    Services is the sleeping Giant the entire investment community is ignoring.

    As far as iPhone growth. I don't believe iPhone8 will mark the end of growth. These are the same assholes who said iPhone6 would end iPhone growth.
    "Services is the sleeping Giant the entire investment community is ignoring."

    That's because the consensus (or perception) is that Apple is shit when it comes to services / cloud / AI / ML or anything cloud related. This article represents a growing sentiment I've noticed more than ever this year. 

    https://medium.com/adventures-in-consumer-technology/apple-inc-a-pre-mortem-568d1a0b7d72#.5xnea5um1

    Maybe you should take a job at apple and fix everything.
    I don't have a problem with Apple and that's not my blog post. I was responding to Sog's point about why the investment community is ignoring services with respect to Apple.
    edited January 2017
  • Reply 7 of 13
    brucemcbrucemc Posts: 1,437member
    The services growth story is solid, and indeed under reported. 

    Not sure 2.4% growth on h/w as an average reflects the potential of Apple Watch and AirPods though. 


  • Reply 8 of 13
    dewmedewme Posts: 1,688member
    Services are a big deal for Apple but only when they have a close and preferable/enhanced tie-ins and integration with Apple devices, service platforms, and managed ecosystem (including 3rd party contributions). Otherwise companies like Amazon and Google/Alphabet (and maybe Microsoft) are going to commoditize services of the App Store variety into micro-profitable nuts & bolts warehouses. I'm a firm believer in the huge upside of a services economy but not at the functional granularity of the current App Store. I'm talking more like flexible-manufacturing-as-a-service, security-as-a-service, high-availability-as-a-service, SAAS, PAAS,  etc., which is services done at a system or customer-value level that the App Store does not really address, and in some cases, obfuscates due to its unmanageable size and lack of robust binding/integration/service-bus types of mechanisms that go far beyond the IFTTT type of macros and scripts. Even though Apple has a massive warehouse of pieces and parts it does not provide a simple and robust model to tie all of these capabilities together, other than hosting them as independent entities on its branded computing devices.

    I think Amazon, Google, and Microsoft are a few steps ahead of Apple in the broader scoped service related areas. This may be an opportunity for Apple to expand and scale up and out its successful integrated device model, i.e., where they tailor the device software, hardware, and integration to build a better smartphone (iPhone) than most of the competition, to include the services layers as integral components of their core products. While iCloud provides some reasonable integration and interoperability capabilities it's mostly geared towards storage and people-to-people messaging and connectivity  within Apple's own application portfolio. As far as I understand at a high level, iCloud is not really providing much in the way of application hosting services, PAAS, SAAS, IoT device integration, or much of anything else and especially where third-party and end-user contributors to the ecosystem are concerned. I suppose things like the Apple-GE collaboration, HomeKit, HealthKit, and other related initiatives are setting the stage and laying down infrastructure for a larger services push that will unfold in coming years. 

    In any case, when looking at services growth I think we need to look beyond the App Store. It's a great parts bin but it's a small piece of a much larger services play.
  • Reply 9 of 13
    sog35 said:
    sog35 said:
    Services, Services, Services, Services.

    Though I doubt 75% of Apple's gross profit will be from Services by 2021.  I'd say about 30-40% is more realistic.

    Services is the sleeping Giant the entire investment community is ignoring.

    As far as iPhone growth. I don't believe iPhone8 will mark the end of growth. These are the same assholes who said iPhone6 would end iPhone growth.
    "Services is the sleeping Giant the entire investment community is ignoring."

    That's because the consensus (or perception) is that Apple is shit when it comes to services / cloud / AI / ML or anything cloud related. This article represents a growing sentiment I've noticed more than ever this year. 

    https://medium.com/adventures-in-consumer-technology/apple-inc-a-pre-mortem-568d1a0b7d72#.5xnea5um1
    and yet Apple services is generating about $50 billion a year in gross receipts.
    @sog35- When you say $50 billion you are including things like developer payouts? I ask because the Services product line in the 10K is $24.3 billion. Also I agree with your assertion the gross profit looks way to high. I will say that by 2021/2022 the services could grow to be the size of iPhone gross profits, if the assertions on growth hold out.
  • Reply 10 of 13
    Hoosierman5000Hoosierman5000 Posts: 1unconfirmed, member
    Just because Apple does something for the first time doesn't make it "next generation" as described with their impliementation of curved OLED screen. From what it sounds, Apple's "next generation" iPhone reads an awful lot like a 2015 Samsung Galaxy S6 edge
  • Reply 11 of 13
    brucemcbrucemc Posts: 1,437member
    steyoun said:
    sog35 said:
    sog35 said:
    Services, Services, Services, Services.

    Though I doubt 75% of Apple's gross profit will be from Services by 2021.  I'd say about 30-40% is more realistic.

    Services is the sleeping Giant the entire investment community is ignoring.

    As far as iPhone growth. I don't believe iPhone8 will mark the end of growth. These are the same assholes who said iPhone6 would end iPhone growth.
    "Services is the sleeping Giant the entire investment community is ignoring."

    That's because the consensus (or perception) is that Apple is shit when it comes to services / cloud / AI / ML or anything cloud related. This article represents a growing sentiment I've noticed more than ever this year. 

    https://medium.com/adventures-in-consumer-technology/apple-inc-a-pre-mortem-568d1a0b7d72#.5xnea5um1
    and yet Apple services is generating about $50 billion a year in gross receipts.
    @sog35- When you say $50 billion you are including things like developer payouts? I ask because the Services product line in the 10K is $24.3 billion. Also I agree with your assertion the gross profit looks way to high. I will say that by 2021/2022 the services could grow to be the size of iPhone gross profits, if the assertions on growth hold out.
    Gross receipts are looking at the total App Store sales - 70% of which goes to developers.  However, that is how traditional businesses report their revenue - Amazon, Walmart, etc.  So if comparing Apple's services business from a revenue perspective, to compare accurately to other companies, you have to look at the gross receipts or total revenue picture.

    Apple has chosen to officially report their App Store revenue as the 30% they keep.  That is why the margins are expected to be very high.
  • Reply 12 of 13
    calicali Posts: 3,495member
    Just because Apple does something for the first time doesn't make it "next generation" as described with their impliementation of curved OLED screen. From what it sounds, Apple's "next generation" iPhone reads an awful lot like a 2015 Samsung Galaxy S6 edge
    It's an iPhone. No one cares about cheap knockoffs. 
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