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Apple's services business is booming and may be worth more than its iPhones

Brian Sozzi
Editor-at-Large

Hardware design loving Steve Jobs probably rolled over in his grave after reading one Wall Street analyst’s hot new take on the value of Apple’s (AAPL) two key businesses (you know Jobs still reads this stuff).

Apple’s services business — which is led by the App Store and Apple Music and generates precious, high-value recurring sales — is worth more than the tech giant’s hardware business, claims Piper Jaffray analyst Michael Olson. Using a traditional investment bank sum-of-the-parts type analysis, which assesses the value of each business unit and then combines them together for an overall valuation estimate, Olson finds Apple’s services business is worth a cool $502 billion.

Olson arrives at that bullish estimate by way of several hypotheses:

  1. Growth in the number of services users of 8% through fiscal year 2021.

  2. Total services revenue of $61.9 billion by fiscal year 2021, up 33% from fiscal year 2019. Apple’s services business would represent about 22% of Apple’s full year sales compared to 18.3% currently.

  3. A steady climb in revenue from each person using Apple services through fiscal year 2021.

  4. User and average revenue per user growth fueled partially by Apple’s latest efforts in services such as Apple TV+, Apple Card, Apple News Plus, and Apple Arcade. The slate of new services suggest Apple has more on the way over the next several years.

The valuation makes sense considering Apple’s services business is higher margin and is growing faster than hardware, and is clearly a focus by CEO Tim Cook. This is the type of lucrative stuff that big time Apple shareholder Warren Buffett craves in his investments. But that doesn’t mean it’s any easier for long-time Apple stock lovers to place their eyes on the projected value of Apple’s hardware business.

Customers look at new Apple iPhones including the iPhone XS, left, iPhone XS Max on display at an Apple store in New York. (AP Photo/Patrick Sison)

Olson estimates Apple’s hardware business — consisting of the iPhone, Apple Watch and AirPods — is only worth $398.8 billion. Among the hardware units, the analyst sees Apple’s wearables business growing the fastest through fiscal year 2021, whereas the iPhone is only expected to grow by 3.6%.

That, too, is logical given the installed base of active iPhone users is more than 1.4 billion. In other words, Apple’s iPhone market is mature and less apt to benefit from high profit margins and fast sales growth.

“The two businesses are largely tied to one another, but we believe Apple's accelerating emphasis on services will drive investors to increasingly focus on services growth and the relative differential in margin vs. products,” explains Olsen. “Said differently, the positives of the services businesses have the potential to outweigh the shortfalls of a relatively weaker year in terms of product catalysts, for both company results and investor sentiment.”

Factor in some $130 billion in net cash, Olson thinks Apple is really worth $1.03 trillion. Apple’s current market cap according to Yahoo Finance data: $880 billion.

More services, please — says Apple shareholders. A foldable iPhone with AR would be welcome, too.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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