Please ensure Javascript is enabled for purposes of website accessibility

This Was Apple's Biggest Catalyst in Q3 (Hint: It Wasn't Services)

By Daniel Sparks – Updated Aug 6, 2019 at 7:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Don't overlook this segment's wild growth.

With Apple (AAPL -0.48%) returning to growth in its recently reported fiscal third quarter, some investors may assume it was the company's services business that played the biggest role in this feat. After all, it's the company's second-largest segment and has been consistently growing by double digits for years. But the wearables, home, and accessories segment actually contributed more growth to Apple's top line during the quarter.

The segment, which includes revenue from the Apple Watch and HomePod, saw revenue increase by $1.8 billion to $5.5 billion. Over the same time frame, services revenue grew by a lesser $1.3 billion, hitting a record $11.5 billion. Services revenue, therefore, was greater than wearables, home, and accessories revenue, but the latter segment accounted for more of Apple's year-over-year increase in revenue during the period.

Here's a closer look at the wearables, home, and accessories segment and why it is such an important catalyst for the company.

Apple Watch Series 4

Apple Watch Series 4. Image source: Apple.

Soaring by 48%

To get to $5.5 billion in fiscal Q3, Apple's wearables, home, and accessories revenue increased by an astounding 48% year over year. This crushed growth rates seen in the other non-iPhone segments, where revenue increased at rates between 8% and 13%. Meanwhile, iPhone revenue fell again, declining 12% year over year.

Growing faster than the rest of Apple's segments, wearables, home, and accessories is particularly important to the company as iPhone sales continue to face headwinds.

Apple had a "blowout quarter for wearables," said CEO Tim Cook during the company's fiscal third-quarter earnings call, referring to wearables in particular. That subsegment's revenue, which consists of sales of the Apple Watch, AirPods, and Beats products, rose at a rate "well over 50% year over year," he added. This compares with a growth rate just under 50% in fiscal Q2. Growth in wearables was driven by "great results for Apple Watch" and "phenomenal demand for AirPods," Cook said.

Services is still Apple's most important catalyst

While wearables may have contributed more growth to Apple's top line in fiscal Q3 than any other segment, services is still the company's most important catalyst. There are two main reasons for this.

First, services revenue has proven to be far more consistent than the company's product revenue. Since it consists of revenue from the App Store, subscriptions to services like Apple Music and iCloud, and advertising, this category isn't reliant on hit product launches like other segments are. Customers are paying for these services year-round. For instance, services revenue consistently rises every year whether iPhone sales are up or down.

Second, services revenue has a much higher gross profit margin than Apple's hardware business. Services gross margin was 64% in fiscal Q3 while Apple's hardware gross margin was 30%.

Of course, even though services remains Apple's most important catalyst, this doesn't mean investors should overlook the company's fast-growing wearables, home, and accessories segment. They should look for more innovation in this part of the business, hoping for more outsize growth. But don't be surprised to see some lumpiness in this performance.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$145.70 (-0.48%) $0.70

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.