Apple Services on Track to Overtake iPhone as Primary Revenue Driver

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Apple has been all about the iPhone since it launched the now-ubiquitous flagship. Going forward, however, that may no longer be the case.

In fact, the Cupertino tech giant’s services revenue is rapidly growing. At this point, it’s on track to overtake Apple’s flagship iPhone as the firm’s primary driver of revenue, Morgan Stanley Managing Director Katy Huberty wrote in an investor’s note distributed to clients on Friday.

That’s largely due to stagnant and even slipping iPhone sales — including predicted sales of the company’s newest iPhone X. Basically, Apple may not be able to rely on its physical products for growth much longer.

Over the next five years, Huberty predicts that services growth will make up more of 50 percent of Apple’s total revenue growth. She added that the iPhone will only make up about 22 percent of that revenue growth over the same time period.

That’s a stark contrast to Apple’s previous fiscal history. Over the past five years, the iPhone has contributed the “vast majority” of Apple’s annual revenue growth — 86 percent, according to Huberty.

“It is through monetization of Apple’s Services business that we see the company still generating mid single digit revenue growth,” Huberty said, adding that about 60 percent of growth can now be attributed to the firm’s services.

Apple’s Services business includes platforms like the App Store, iTunes, Apple Music, iCloud, Apple Pay and AppleCare. Many of these services, of course, are subscription-based.

Huberty estimates that Apple now makes about $30 per device via various services — up from $25 just two years ago. But she notes that most Apple users don’t pay for any services, which could mean that revenue is actually much higher.

In other words, Apple may be making as much as $60 per each “active” user who pays for services. And there’s “much room” for growth in the area, since only about 18 percent of Apple’s total device base subscribe to the company’s platforms, Huberty added.

There are sections of Services that, according to Morgan Stanley, has yet to be “fully monetized.”

Apple Music, for example, is only used by about 2.9 percent of Apple users — despite its considerable growth in recent years and its reported 36 million subscribers. Adoption of Apple Pay has also been slow, despite the fact that it’s currently available in about 50 percent of U.S. retail locations.

During the 2017 Q3 earnings call, Apple reported record-breaking services growth — and noted that its Services business has officially become more valuable than Facebook. The Cupertino tech giant has also set its own goal to double its reported 2016 services revenue by 2020.

Apple is still on track to become the world’s first trillion dollar company. Huberty has placed a target price at $203 on Apple shares. Currently, shares are trading for $166, down 1.36 percent.

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