Apple (AAPL 0.51%) has been one of the best-performing companies in the last two decades. The excellent performance has translated into its market capitalization nearing an astounding $3 trillion.
Savvy investors who follow Apple probably know these three things about the business: The iPhone continues to drive top-line growth. Apple has a robust and growing services segment. And finally, Apple has a history of successful innovation. Let's look at each in greater detailer below.
Image source: Getty Images.
1. The iPhone is still driving revenue
The iPhone is arguably the most successful product of all time. Launched over a decade ago, new iterations are driving hundreds of billions in sales for Apple. In its most recent quarter ending Dec. 25, Apple's iPhone sales totaled $72 billion, up from $66 billion during the same quarter the year before. To put that figure into context, Apple's overall sales were $124 billion in the quarter. Apple's most recent launch, the iPhone 13, came with the latest 5G technology expected to drive consumers to upgrade older versions over the next couple of years.
The iPhone propels the company's flywheel and is an attractive entry point for consumers into Apple's ecosystem. Once a user adopts an iPhone as their phone of choice, they are less likely to switch to a new brand due to Apple's strong customer retention.
That has undoubtedly helped Apple grow revenue from $229 billion in 2017 to $366 billion in 2021. Shareholders would be thrilled if Apple could match or beat that growth over the next four years. The top-line growth flowed to operating income increases from $61 billion to $109 billion in that same time. Increasing sales by over $130 billion in four years is a difficult feat, but boosting operating income by $48 billion raises the bar further.
2. The rise of the services segment
Over the last two decades, Apple has built a robust and growing services segment. The business features exciting products like Apple Music, Apple TV+, Apple Arcade, iCloud, etc. Consumers have liked the offering that compliments an iPhone and improves the ownership experience. For instance, an iPhone user with an Apple Music subscription can create a custom music playlist and start playback through a voice command without touching the phone.
Apple was the first streaming content service to capture the best picture award at the Oscars for Coda. The acclaim could attract a new swatch of subscribers to Apple TV+, a boon to an already robust services business.
The segments' revenue increased to $20 billion in the fourth quarter, up from $16 billion in the same quarter the year before. What's more, the services segment has significantly higher profit margins than products. Indeed, in Q4, the gross profit margin in the services segment was 72.4%, meaningfully higher than the 38.4% of product sales. For that reason, investors are encouraged by the growth of the more profitable segment over the years.
3. History of innovation
Apple is, by no stretch of the imagination, a one-hit-wonder. The company has a lengthy history of successful innovation. The iPhone is among a wide portfolio of leading-edge technology Apple has developed. Those hits include the iPad, iMac, iPod, Apple Watch, and AirPods. Apple's innovation is not limited to products, and it counts several famous services to its name, including the App Store, iTunes, Siri, Apple Music, Apple TV+, IOS, and more.
The success shows how Apple can keep creating wildly popular products and services to drive sales and profits, delivering consistent shareholder returns in the long run.
