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Where Can Apple's Growth Come From Now?

By Daniel Sparks - Updated Apr 16, 2019 at 2:47PM

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In fiscal 2019, iPhone almost certainly won't be the catalyst it was in fiscal 2018.

With Apple ( AAPL -0.32% ) recently saying that its revenue for its important holiday quarter is going to be significantly below management's initial guidance for the period, some investors may be worried about the company's long-term growth potential. After all, the shortfall in Apple's revenue for the quarter is due to declining iPhone sales, management said. Since iPhone is Apple's largest business segment, this begs the question: Are there other areas that can help boost Apple's business?

While it won't be easy for Apple to make up for weakness in a segment that currently represents 63% of the tech giant's trailing-12-month revenue, there are two segments with potential to be meaningful catalysts. Indeed, over the long haul, these two segments could become integral to Apple's growth story. These segments are services and "other products."

A woman uses Apple Pay to buy a coffee

Image source: Apple.

Services

Apple's most important catalyst is arguably its services business, which includes revenue from iTunes, the App Store, and licensing, as well as revenue from services like Apple Music, AppleCare, iCloud storage subscriptions, and Apple Pay. As the company's second-largest segment, it accounted for 14% of fiscal 2018 revenue -- up from just 11% of revenue two years ago. Highlighting the segment's strong growth, trailing-12-month revenue for the segment is up 24% year over year.

Importantly, Apple has said its services revenue isn't as easily influenced by volatility in emerging markets or the ebbs and flows of product launches as its iPhone segment is, making it a steadier and more reliable catalyst for Apple. In addition, management asserts that its services revenue growth is more closely related to the size of Apple's installed base of active devices, not quarterly sales. Fortunately, Apple's installed base is growing rapidly, up by about 100 million units over the past 12 months. "There are more Apple devices being used than ever before," Apple CEO Tim Cook said in his recent letter to shareholders about the company's lowered outlook for its first quarter of fiscal 2019, "and it's a testament to the ongoing loyalty, satisfaction and engagement of our customers."

In a recent interview with CNBC's Mad Money host Jim Cramer, Cook said Apple is poised to announce more new "services" this year. While the CEO didn't describe the services, Apple is rumored to be working on a streaming-TV service and a news subscription service.

Other products

Looking beyond Apple's services business, another key catalyst is Apple's "other products" segment. The segment, which includes sales from Apple Watch, AirPods, Beats products, Apple TV, HomePod, iPod touch, and other accessories, is the company's smallest segment. But it's also Apple's fastest-growing segment. The segment's revenue climbed 35% year over year in fiscal 2018 and accounted for 7% of the year's total revenue.

Apple Store employees stocking shevles with Apple Watch bands

Image source: Apple.

Wearables, or sales of Apple Watch, AirPods, and Beats products, have been a major driver in the segment's growth. Wearables sales have been growing by 50% year over year in recent quarters, including Apple's first quarter of fiscal 2019, according to Cook's recent letter.

Combining to account for 31% of Apple's revenue, these two segments are still small in comparison to iPhone. But they're meaningful enough -- and growing fast enough -- to potentially help save Apple from top-line year-over-year declines in the coming years if iPhone continues to see weakness. Further, if these segments keep growing this fast in the coming years, they could begin to rival iPhone in size -- at least when viewed together.

Check out the latest Apple earnings call transcript.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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