This narrative is primarily based on Ben Thompson's (Stratechery) view that Apple has transitioned from being a product-driven company to a services-oriented one.
While the iPhone remains central to Apple's business, hardware differentiation has plateaued. Instead, Apple's strategy has shifted towards expanding its ecosystem through services like Apple Intelligence, which requires a large install base rather than hardware upgrades.
Apple's future growth hinges on its ability to leverage software and services across its hardware user base. Software is not an area that Apple has been historically strong, and they are already behind with AI versus with Google and Meta.
Apple Services (US$18bn( catching up with Product (US$22bn) on a quarterly basis, remember this is low season.
Apple Services margin of 74% means the segment is as profitable as Products at 35%
Catalysts (or lack of):
- New hardware (iPhones etc) have lost their edge, unlikely to drive long term growth
- AI-driven "supercycle" has potential to drive new iPhone sales (Apple Intelligence)
- Lower-end iPhones (non-Pro) have potential to expand the addressable market
- Increasing focus on services like Apple Intelligence, AI, and health-related features
- Already caught off guard with AI and unlikely to catch up
Assumptions in 5 years:
- Product revenue grows somewhat from low-end iPhones sales from $300bn to $350bn
- Services revenue grows somewhat from $85bn to $108bn
- Total Revenue $458bn
- Net margins improve slightly with shift to services form 26% to 30%
- Market slowly appreciates the Apple Boomer narrative and reflects a more “mature stable” PE ratio of 25x
Risks:
- No pricing power on low-end iPhones
- High-end iPhones lose their edge to competitors e.g. Pixel Samsung
- Not well positioned to develop the ‘next iPhone’ (Meta is more likely to win here)
- Position on data protection may limit their ability to leverage AI and lose out to competitors
How well do narratives help inform your perspective?
Disclaimer
ChadWisperer is an employee of Simply Wall St, but has written this narrative in their capacity as an individual investor. ChadWisperer holds no position in NasdaqGS:AAPL. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimate's are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
