OK boomer: No longer a product company

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