With the iPhone, MacBook, iPad, and various wearables, Apple (AAPL 0.83%) sells some of the most popular hardware products on the face of the planet. And these devices alone have made this enterprise a cultural icon.
But the business generates 36% of its total gross profit from an entirely different segment. This division only will become more important over time for Apple.
Here's what investors need to know about this top FAANG stock.
Supporting the Apple ecosystem
In addition to hardware products, Apple operates a services segment that makes money in a number of ways, from things like advertising, AppleCare, iCloud, the App Store, Arcade, Fitness+, Music, News+, and TV+. There's also the company's foray into financial services, with the popular Apple Card and Apple Pay offerings.
In fiscal 2023 (ended Sept. 30), the business generated $85.2 billion from services, which represented 22% of overall company sales. This was up 9% year over year, compared to a 6% drop for products.
However, services produced $60.3 billion in gross profit, translating to more than one-third of Apple's total. Clearly, this is a high-margin revenue stream for the company.
There's no denying that these various services face stiff competition in their respective industries. For example, Fitness+ competes with the likes of Peloton, Music goes up against Spotify, and TV+ has to fight for subscribers in a crowded streaming landscape dominated by Netflix. Moreover, Apple Card and Apple Pay face virtually an unlimited number of credit card and payment rivals.
But services benefit Apple because they help create the company's powerful ecosystem. The beautifully designed, easy-to-use hardware devices draw consumers in, but the software and services keep them engaged and locked in.
Warren Buffett's conglomerate, Berkshire Hathaway, has a 5.9% stake in Apple. He once said that if someone offered you $10,000 but you could never use an iPhone again, you'd probably reject that proposition. This demonstrates the success of the ecosystem strategy.
NASDAQ: AAPL
Key Data Points
The future of hardware
The impressive rise of Apple's services division doesn't mean that the hardware segment isn't important. In fact, it has been absolutely critical to the company's success historically, and this will undoubtedly be the case going forward.
Consider Apple's economic moat, supported by an incredibly powerful brand. Selling physical products has been key to the rise of Apple's brand presence, with the vast majority of the credit going to the iPhone. Investors may or may not be surprised that this product still represents more than 50% of overall company revenue.
More recently, Apple just released its Vision Pro headset, which combines augmented reality and virtual reality into a sleek design. The starting price tag of $3,499 is steep, so this item likely targets a more affluent customer.
CEO Tim Cook said on the Q4 2023 earnings call that the device "has gotten such an amazing response from developers who are currently creating truly incredible apps." This is the perfect example of how the company once again seamlessly mixes hardware and software.
Management said there are now more than 2 billion active devices worldwide. The higher this figure goes, the more money the business will be able to make from services. So it's absolutely important for Apple to keep selling more products, which will then drive greater recurring revenue over the long term.
