Kudos to Apple (AAPL 0.64%) for making a point of being perpetually innovative. Too many companies rest on their laurels -- or aging products -- only to end up scrambling when those goods become obsolete. Not Apple, though. The world didn't know how much it needed smartwatches until Apple made them. The app store is pretty cool, too, cementing all of its hardware and customers into a robust digital ecosystem.
As it stands right now, however, Apple is still mostly a smartphone company. The iPhone accounts for roughly half of its revenue, making it more than three times bigger than even its second-biggest business.
It's not the end of the world. If your revenue is going to be narrowly focused, the world's most popular smartphone is certainly a solid focal point. It's worked out well for the company since the very first iPhone's debut back in 2007.
Nevertheless, there will come a time when the iPhone isn't the powerful growth engine it is now. It's not too soon to start asking what the company's got in store for that era.
Apple's biggest business is bumping into stiffening headwinds
The graphic below says it all. Of Apple's fiscal first-quarter revenue of $117 billion, $65 billion -- or 55% -- of it came from sales of its iPhone. The next-nearest profit center is digital services, but at just under $21 billion, it's a distant second. And, know that Q1's revenue breakdown is fairly typical for the company.
Data source: Apple Inc. Image by Motley Fool.
So far, no big deal. As was noted, the iPhone is not only Apple's biggest breadwinner, but thus far has been its biggest growth driver for over a decade. If it works, then it works.
There are a couple of red flags now waving that suggest the iPhone's growth-driving days are numbered, though. One of these red flags is the simple fact that unit sales of the devices aren't actually growing.
While the advent of COVID-19 sparked a sales surge, unit sales were waning in the four years leading into the pandemic. Also note that the pace of sales growth has cooled again since 2020's surge, according to numbers from technology market research outfit IDC, in step with the entire smartphone industry's sales slowdown since 2016.
Data source: IDC. Chart by author. All figures are in millions.
The other red flag comes from data still being supplied by Apple itself. Although it no longer reports official unit sales of the iPhone, it does still report total quarterly iPhone revenue. This figure is still generally coming in higher on a year-over-year basis, but its growth pace has slumped to single-digit levels since late 2021 and even turned negative for the quarter ending in December.
Data source: Apple Inc. Chart by author. Revenue data is in millions of dollars. YOY = year-over-year.
Now connect the dots. Revenue is merely holding steady while unit sales are falling for one overarching reason: higher selling prices. Although the dynamic hints at pricing power, with the average new iPhone now selling in the record-breaking ballpark of $1,000 apiece, even the venerable Apple may soon find the ceiling of how much consumers are truly willing to pay for a smartphone.
Your Apple "homework"
It hasn't mattered much yet, if at all. Apple shares continue to move higher more often than not, and the company continues to grow other profit centers, like services and wearables. It's also easing its way into virtual reality.
There's no denying, however, that Apple is still exceedingly dependent on one single product that's just not likely to maintain its historical growth pace (in terms of unit sales or revenue). It's going to need something else to offset this headwind in the foreseeable future. If it's not another product or business line, it at least needs to be a major reinvention of an existing one.
It's not too soon for shareholders to start asking questions about this problematic revenue source, particularly in light of this fiscal year's projected sales and earnings contraction. Maybe there are answers out there. If they're out there, though, the company's certainly not bringing them to the forefront.
