Can Apple Really Turn Into a Services Company?

Dear Reader,


Apple is trying hard to reinvent itself as a service company. This is easy to understand, since iPhone sales account for more than 60% of Apple's revenue. And iPhone sales are falling. Apple even stopped publishing its iPhone, iPad and iMac unit sales, since apparently, especially iPhone unit sales, Apple hardware unit sales are falling.

This is a logical development, because the market for smartphones is globally already saturated and smartphone unit sales have already started falling. It is logical to assume that global smartphone sales will continue to rise with approximately the level of world GDP growth, which should hover around 3% in recent years.

So Apple is trying hard to convince its investors it can turn itself into a service company driven by App Store application sales. Apple currently receives approximately around 35 billion USD  a year from application sales revenue. One of the benefits of turning into a service company is that service companies usually trade at higher valuation multiples like Price/Earnings, Price/Sales, Price/Book value. Another obvious reason is the higher expected growth of the services market Apple is targeting.

So can Apple reinvent itself into a service company? I would say partially yes. I think the key to Apple becoming a service company is not so obvious - it is the iPad. Apple needs to make the iPad ubiquitous. iPad's larger screed could prompt more consumers to download and pay for applications from the App Store from which Apple gets a 30% cut. An important further step is to make the iMac able to run App Store applications seamlessly. This would again make consumers more likely to pay for higher margin and higher added value applications.

So, I would bet Apple's service revenue would grow to about 80 billion USD in 7 to 10 years. For the last fiscal year Apple made 265.6 bln. USD in revenue. I would say in 7 to 10 years Apple would make about 320 billion. USD in revenue. So 80 billion USD in service revenue would make about 25% of Apple's revenue in 7 to 10 years, according to my assumptions. Apple's market valuation should prove much more resilient than Facebook, Google and Amazon's in the ensuing global economic recession. What is more, services are more profitable. And Apple would not need always to make the huge effort to come up with a new blockbuster hardware model or innovation every year. It will instead enjoy the much more stable and predictable revenue from services sales.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.

Conflicts of interest: I may possess some of the securities, currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Respectfully yours,

Petar Posledovich