One of the biggest debates over Apple shares is the company’s ability to drive growth in its services business. There are a lot of reasons investors want to see the company build up that part of its portfolio.
Wall Street views services as making Apple’s devices business stickier—the more services from Apple (ticker: AAPL) someone uses, the more likely that person is to keep buying iPhones, rather than defecting to Android. And margins are higher on services than on hardware, so a shift away from hardware tends to boost profitability.
Evercore ISI analyst Amit Daryanani took a dive into Apple’s services business, and came away in a report on Thursday more bullish than ever about the opportunity. He thinks Apple can exceed $100 billion in services revenue in the fiscal year ending in September 2024, accounting for 30% of total revenue and 45% of gross profit. That is up from about 30% of fiscal 2019 profit—the company had $46.3 billion in services revenue in fiscal 2019. The analyst repeated his Outperform rating, lifting his price target to $345 from $330.
The analyst is especially bullish on the potential for new additions to the services portfolio, as well improving average revenue per user. “Over the last five years, Apple’s services business has sustained about 20% [compounded annual revenue growth] creating a sizable base of high-margin, recurring revenue,” he writes in his research note. “Growth over the last five years was driven by installed base growth with limited contribution from incremental monetization and/or new initiatives.” But he thinks the source of growth is shifting to additional services and higher adoption rates.
“Apple has announced numerous services offerings in the past year (Card, TV+, Arcade), which should drive higher [average revenue per user] and keep services growth elevated,” he writes. “Higher services mix should push gross margins higher and help smooth cyclicality. In addition, Apple continues to build its base of subscription services, which helps make the case for a higher multiple given the recurring nature of the cash flows…Net/net, services remains an underappreciated growth lever especially given the shift in growth towards monetization and subscription based model.”
Daryanani singles out three potential new areas of opportunity