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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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