Why Are Analysts Optimistic about Apple’s Services Business?

Analyst Gene Munster from Loup Ventures has suggested that investors should now view Apple (AAPL) as a services provider rather than a hardware manufacturer. We have seen that Services is already Apple’s second-largest business and is a critical driver for revenue growth.

Katy Huberty from Morgan Stanley (MS) expects the Services segment’s sales to rise at a CAGR (compound annual growth rate) of 20% between fiscal 2019 and fiscal 2023, which would mean the Services revenue might reach a whopping $101 billion in 2023.

Services growth will be driven by higher user engagement by the average iPhone user. Currently, around 40% of Apple users pay for applications. The annual spending per user could rise from $120 per year in 2018 to $220 per year in 2023.

Earlier this year, Jeffries initiated coverage on Apple stock. The investment bank expects Apple’s Services business to account for 25% of its total revenue in fiscal 2020, up from 16% in fiscal 2018. This segment is also expected to account for 40% of total gross profits by fiscal 2020.

Apple is set to leverage the benefits of its massive iPhone installed base, which stands at a whopping 700 million as of the end of fiscal 2018.