There isn't much of a mystery around Apple's (AAPL -0.81%) success. The company's highly coveted iPhones are incredibly popular and there's a strong loyalty behind the devices, often attracting fanfare about the latest iteration and what new features or changes there will be.
But Apple's business isn't all about the iPhone. While it is a significant part of its operations, the company has been diversifying over the years and becoming less dependent on that revenue stream. It's a positive trend because it makes the company less vulnerable to challenges in that area of its business. And in the end, that will help make it a better investment.
56% of Apple's revenue last quarter came from iPhones
Last month, Apple reported its fiscal first-quarter earnings. For the period ending Dec. 31, 2022, the company's sales totaled $117.2 billion -- a 5% decrease from the prior-year period. And a big reason for this was iPhones sales, which account for 56% of revenue, fell by more than 8%.
But there were areas of its business that generated growth, including iPads and services, which rose by 30% and 6%, respectively. Services, in particular, are of key importance as that's Apple's second largest revenue stream. It includes revenue from its App Store, News, Music, Fitness, and other digital content. And last quarter, revenue from this segment reached an all-time high of $20.8 billion.
Apple has been slowly diversifying its business over the years as it has grown its services. And while 56% of revenue going to iPhone revenue is significant, the company has less exposure to that segment than it did in the past.
Apple's sales mix has been changing in recent years
In fiscal 2017 (Apple's year ends in September), iPhone revenue totaled $139.3 billion and represented 61% of the company's top line. That year, services contributed $32.7 billion and made up 14% of revenue. By fiscal 2022, the breakdown was 52% for iPhone revenue and around 20% for services.
Although that's different from the revenue mix from last quarter, it's for a full year and may be more indicative of the true mix. But either way, the pattern remains clear: iPhone revenue is making up less of the company's revenue than it did in the past.
Data source: Company filings. Chart by author.
Although this may not be a huge shift, this pattern is likely to continue as Apple expands its services business and becomes less dependent on iPhone revenue. One example of that is in healthcare, where the company is reportedly working on a glucose monitor that may potentially be part of the Apple Watch. By providing users with more information and data, there can be more opportunities to monetize that and generate more service-related revenue.
And there's plenty of incentive for Apple to continue growing this area of its business as services enjoy higher margins than the company's products as there is a fraction of the cost involved with them. Last quarter, Apple's gross margin on products was 37% while on the services side, the margin was up around 71%.
Apple is a great business to invest in today
Apple hit a milestone last quarter when it reported that its install base for active devices topped 2 billion. That's a lot of people using the company's devices and, potentially, its services. Apple's business today still centers around the iPhone but services is a segment that is going to play more of a role of its operations in the future. That means recurring revenue and more growth opportunities for the company down the road.
Although the business is worth about $2.4 trillion today and the tech stock is trading at an above-average 26 times earnings, Apple is still likely to rise in value given its solid fundamentals (it generated more than $95 billion in profit over the last four quarters) and strong brand. It's worth paying a premium for this type of business, especially if you're holding for the long haul and want a quality stock that you can count on for long-term growth.
