Some investors may be baffled by Apple (AAPL +2.05%) stock's strong performance recently, including a gain of more than 5% over the last week and nearly 39% year to date. They may wonder: Shouldn't the fact that Apple's revenue declined nearly 3% year over year in fiscal 2023 weigh on stock price performance? But there's a strong catalyst bubbling under the surface, keeping the bulls upbeat.
One key part of Apple's business bulls are betting on is none other than its services segment -- a segment consisting of revenue streams that are more consistent, reliable, and predictable than the company's hardware sales. We're talking about Apple's revenue from advertising, AppleCare, cloud services, digital content, and payment services. Together, these high-margin, fast-growing parts of Apple's business are transforming the company.
Here's a closer look at why Apple's services business is such a strong catalyst for the stock.
NASDAQ: AAPL
Key Data Points
A loyal user base
You can't talk about Apple's services business without acknowledging its installed base of active devices, numbered in the billions. Though Apple didn't provide an updated figure on exactly how many Apple devices are being actively used around the world, Apple's chief financial officer Luca Maestri did say during the company's fiscal fourth-quarter earnings call that it "continues to grow at a nice pace..." As of the company's last update on its size, Apple said it boasted more than two billion active devices.
This installed base "establishes a solid foundation" for continued expansion of its services business, Maestri said during the company's earnings call.
Broad-based growth drivers for the segment
Highlighting services' incredible momentum, the segment's fiscal Q4 16% year-over-year revenue growth was fueled by growth in every services category and geographic segment. This is "a direct result of the strength of our ecosystem," Maestri explained.
One area of services worth calling out, which management said continued to grow at a strong pace during fiscal Q4, is paid subscriptions.
"We have well over 1 billion paid subscriptions across the services on our platform, nearly double the number we had only three years ago," Maestri noted.
A flywheel effect
Notably, there's a flywheel effect at play for Apple's services business. Increasing content and features for its services segment leads to more engagement, and greater engagement leads to more satisfied customers and ultimately bolsters the total number of active devices. More active devices, of course, means Apple can invest more aggressively in content and features.
Maestri described this flywheel effect during the tech company's fiscal fourth-quarter earnings call.
And really then we step back and we think about why is it that our services business is doing well, and it's because we have an installed base of customers that continues to grow at a very nice pace, and the engagement in our ecosystem continues to grow.
We have more transacting accounts. We have more paid accounts. We have more subscriptions on the platform. And we continue to ... add content and features. We're adding a lot of content on TV+, new games on Apple Arcade, new features, new storage plans for iCloud. So it's the combination of all these things and the fact that the engagement in the ecosystem is improving, and therefore, it benefits every service category.
A high-margin business
But services' strong top-line growth and broad-based underlying momentum is only half of the picture. Investors can't fully appreciate Apple's services business until they realize how lucrative it is. Apple's services gross profit margin in fiscal Q4 was 70.9%. This compares to its average gross profit margin of 36.6% for its hardware. In fact, Apple's strong growth in services, combined with the segment's high gross profit margin, is the main reason the company grew its earnings per share 13% year over year in fiscal Q4 despite revenue falling almost 1%.
Today, Apple's services business accounts for less than a fourth of revenue and 39% of its gross profit. This powerful catalyst, however, looks poised to only become more important to the company over time. Patient and long-term oriented investors, therefore, have a good reason to be bullish on the stock.
