Don’t Discount Apple’s Highest-Growth Business

Apple investors would be wise to pay attention to this product.

Aug 7, 2014 at 12:00PM

The good news keeps coming in regards to Apple's (NASDAQ:AAPL) App Store. The newest revelation -- the App Store's record-setting July -- builds upon the momentum established at Apple's Worldwide Developer Conference when it announced that the iOS App Store has had 1.2 million applications and 75 billion downloads to date. Understandably, Apple CEO Tim Cook was pleased:

However, astute investors have noticed the success of the App Store -- and its corresponding line item, iTunes/Software/Services -- for the greater part of a year. As a matter of fact, the chart below shows how successful the product line has been from a revenue-growth standpoint:


Source: Apple 10Qs. Figures in thousands. Right Y-Axis is growth in percent. Left Y-Axis is revenue.

Apple's highest-growth product
As the chart shows, this segment continued to impress during the last year by growing at a healthy 15.9% clip. The second-fastest product, as far as revenue growth is concerned, is Apple's famed iPhone; but that still comes in more than 500 basis points lower --10.6% vs.15.9%.

Obviously, this is growing from a smaller base; but don't discount this segment's importance. This segment's growth more than tripled the company's growth overall, and more than offset the iPod's awful performance decline of 47% year over year.

But it's more than just a product
The great thing about growth in this segment is it portends future growth for the company. See, the key to Apple's success is twofold: high-quality hardware, and a sticky ecosystem chock-full of apps. And so far, it has been massively successful: A recent WDS survey found that 76% of all iPhone users replaced their iPhones with a newer iteration. Apple's arch-nemesis, Samsung (NASDAQOTH:SSNLF), can only boast of a 58% refresh rate. No other vendor had a 50%+ replacement rate.

That makes sense in a way, because Apple's "walled-garden" approach of controlling both hardware and software, and mating that with developer-based content, results in a better user experience. Something former CEO Steve Jobs learned from his computer battles with Microsoft was simplicity and ease-of-use by controlling the product rather than relying on a hardware/software partnership. To be fair, other companies boast of their own operating systems -- most notably, Microsoft's Windows Phone and BlackBerry -- but Apple's App Store reach and ecosystem provide a heavy moat to the brand.

Final thoughts
It's no wonder that Apple's Tim Cook is happy about Apple's App Store's success. Not only is it Apple's highest-growth product on a trailing-12-month basis, but each dollar of revenue provides a disincentive of sorts -- and a powerful one at that -- against current iPhone users moving to a competitor. This twofold purpose is why Apple investors would be wise to keep an eye on this product.

Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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