Which way, Apple?

The iPhone is to Apple as the PS5 is to Sony, right? For context, since 2012 till now the iPhone has accounted for over 45% of Apple’s entire revenue. Is this going to change soon though? If there’s one thing about Apple Inc it’s that the company prides itself on innovation (hello, the AirPods, the Apple watch). Flowing from this, and the nature of its most recent Apple event, is it possible that in the not so distant future, we will be seeing an Apple that is not centred around the iPhone?

First, let’s look at the current major streams of revenue for Apple Inc

Not so random: Apple became the first U.S. public company to surpass $1 trillion in market capitalisation in 2018, and just two years after hitting that milestone, the company also became the first U.S. public company to hit the $2 trillion mark in 2020. (How??) Here are the company’s most profitable business lines:

iPhone 

This is Apple’s core product and its profit puppy – as mentioned earlier the iPhone accounts for over 45% of the company’s revenue. The iPhone has ranked among the top five smartphones in the world since 2009. In its Q1 2020 earnings result, the company reported its highest quarterly revenue ever, fueled by strong demand for the iPhone 11 models; iPhone sales were $55.96 billion.

Services 

Apple’s revenue in this segment comes from selling services like the iCloud, App Store, Apple Music, Apple Pay, Apple TV+, Apple News+, Apple Arcade, Apple Card and the recent Apple One which is a bundle of various services. Revenue from this segment has grown consistently over the years – from only $5.2 billion in 2010 to $12.72 billion in Q1 2020 alone. According to Apple, there are over 450 million paid subscriptions on Apple’s platform.

Mac

This is Apple’s personal computer business that includes the MacBook (laptop) and the Mac (desktop). In its Q3 2020 results, the company posted revenue of $7.08 billion from its Mac business. Mac’s contribution to Apple’s growth has been on the decline, as compared to its other businesses, due to slowing demand for personal computers worldwide (pre-Covid19 of course).

iPad

When Apple launched its iPad in 2010, it quickly became the first commercially successful tablet to hit the market; the device sold more than three million units in the first three months after it was released. In Q3 2020, iPad sales were up over 31% and generated revenue of $6.58 billion. As of Q4 2019, the iPad held a 36.5% share of the global tablet market.

Wearables and accessories

This segment is made of the Airpods, Apple Watch and HomePods and it is easily one of the fastest-growing businesses of the tech giant. In Q1 2020, revenue from this segment was larger than revenue from the Mac segment for the first time ever, and in its Q3 2020 results, AirPods and Apple Watch sales grew 16.74% from Q3 2019.

Now, here’s the thing

Although the iPhone technically remains Apple’s profit puppy, Apple is pushing the narrative, especially to its investors, that iPhone sales are no longer the bedrock of its business. The tech giant is now fueling growth with its expansive suite of services and its wearables & accessories and it seems like this might be a long term play for the company. Revenue from Apple’s services hit an all-time high of $13.16 billion, accounting for over 20% of Apple’s revenue in Q3 2020. The wearables and accessories have also fared pretty well in recent years. As earlier stated, AirPods and Apple Watch sales grew 16.74% in Q3 2020 from Q3 2019. In terms of total shipments, the company sits far atop the earbuds market; shipments for the AirPods rose from 5 million in Q2 2018 to more than 15 million in Q2 2019.

These milestones signal where the growth potential is for Apple’s business and underlines how Apple’s future could be based around wearable devices instead of smartphones and PCs. Apple definitely caught on to this. It has been trying to persuade investors to focus more on its Services business over its iPhone business, stating that what matters is growing the number of active Apple devices that can generate recurring revenue as users buy additional services. The company pushed forward this narrative in Q1 2020 by disclosing, for the first time, the number of all active Apple devices: 1.4 billion. This represents a blank canvas through which the company can experience exponential growth. Tapping into monthly subscriptions, transaction fees and cloud storage costs would prove to be a more consistent source of income as against smartphone sales.

Going forward…

In the not so distant future, we can expect to see a non-iPhone centred/dependent Apple Inc;  its services and wearables divisions could take centre stage. The most recent Apple event lends credence to this theory. At said event, the company announced a flurry of new products and services but did not announce new iPhones. Although it’s not entirely surprising, it’s still highly unusual for the company which has announced new iPhones every September since 2012. The Apple event which took place on September 15, 2020, saw the company introduce new Apple Watches, iPads, Fitness+ services and the Apple One service bundles to customers around the world. This could very well be foreshadowing the calibre of future of Apple events – almost like Apple is easing stakeholders out of the iPhone focus.

It’s worthy of note that Apple did not start as a smartphone company. Granted, the iPhone can be credited for the company’s massive success, but Apple was originally a large computer company with an MP3 business on the side. So, if indeed it is upholding its mantle of innovation, and restructuring itself, odds are that it will be successful.

The above reflects the opinions of only the writers who are associated persons of Bamboo Systems & Technologies Ltd. and do not reflect the views of Bamboo Systems & Technologies Ltd. or any of its subsidiaries or affiliates. They are meant for informational purposes only. They are also not research reports. The third-party information provided therein does not reflect the views of Bamboo Systems & Technologies Ltd., or any of its subsidiaries or affiliates. All investments involve risk, and the past performance of a security or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit or protect against loss. There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing. The price of a given security may increase or decrease based on market conditions, and customers may lose money, including their original investment.