Apple’s Services To Top $50 Billion Profits By 2025 – Beating iPhone

by Trefis Team
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Apple’s Services business has emerged as the company’s second-largest segment, following the iPhone, posting revenues of $46 billion in FY’19. The business has grown at a CAGR of 21% over the last 5 years, compared to just about 7% for the iPhone, and gross margins are also significantly thicker compared to the hardware business (63% versus 32% in FY’19). It’s also likely that the increasing mix of services revenue has contributed to the rally in Apple’s stock, which is up 50%+ over the last six months.  In this analysis, we try to break down the various drivers of the services business, using select figures that Apple discloses and other publicly available data. We also outline how the Services segment could generate more gross profits than the iPhone by the year 2025 if revenues grow at mid-to-high teens levels, while the iPhone continues to post low single-digit levels of growth.

View our dashboard analysis Breaking Down Apple’s Services Revenue for detailed estimates on Apple’s services revenues streams and forecasts for 2025.

Segment Est. 2019           Revenue

AppStore                                  $15 billion

Licensing                                 $10 billion

Apple Care & Others             $7.5 billion

Apple Music                           $5.4 billion

iCloud                                      $4.5 billion

Third-Party Subscriptions  $3.6 billion

Total Services                    $46 billion

 

# 1: AppStore Revenue

  • We estimate that Apple earned $15 billion from the AppStore in FY’19, assuming that each iPhone user downloaded 10 paid apps, priced at $5 per App, with Apple taking 30% of the gross revenues.
  • This figure should be in the right ballpark, given that Apple indicated that it paid out about $38 billion to developers over the calendar year 2019 (translating into $16 billion in booked revenue based on a 30% take rate).
  • We project that revenues will grow to close to $23 billion by 2025. For more details of the forecast, view our dashboard analysis Breaking Down Apple’s Services Revenue

#2. Licensing Revenue

  • Apple receives licensing payments from various third parties, a meaningful part of the revenues likely come from search behemoth Google, which pays Apple to be the default search engine on Apple devices.
  • Goldman Sachs estimated that these fees – which Google dubs traffic acquisition costs – stood at roughly $9 billion in FY’18.
  • We estimate that licensing revenues stood at $10 billion in FY’19, assuming 1 billion iPhone users and $10 per iPhone in licensing revenues.
  • We project that revenues will grow to close to $15.6 billion by 2025.

#3. Apple Care, Apple Pay & Other Revenue

  • We estimate that revenues from Apple Care, Apple Pay and Other Services stood at $7.5 billion in 2019.
  • We project that revenues will grow to close to $15 billion by 2025.

#4. Apple Music Revenue

  • Apple Music had about 60 million subscribers as of June 2019. Assuming an average price of $7.50 per month per user, this would translate into revenues of over $5 billion
  • We project that revenues will grow to close to $9.4 billion by 2025.

#5. iCloud Revenue

  • Assuming that 15% of all iPhone customers opt for iCloud Services, paying an average of $2.50 a month, this would translate into iCloud revenue of $4.5 billion in 2019.
  • We project that revenues will grow to $11.5 billion by 2025.

#6. Third-Party Subscription Revenue

  • Apple indicated that it held about 450 million paid subscriptions on its platform as of Q4’19. Subtracting out Apple Music subscriptions, this would imply that there were ~390 million third party subscriptions.
  • Assuming that each subscription costs $5 per month, with a take rate of 15%, this would translate into revenues of about $3.6 billion.
  • We project that revenues will grow to close to $9 billion by 2025.

#7. Apple TV+ Revenue

  • Apple launched its subscription video service in November 2019. While the company is offering the service for free for a period of 1 year with the purchase of select Apple products, it has priced the service competitively at $5 per month.
  • If Apple is able to sign on 100 million paying users over the next 5 years, it could translate into revenues of about $6 billion by 2025.

Services Could Be The Biggest Driver Of Apple’s Profits By 2025

We estimate that Apple’s services revenues will grow to about $89 billion by 2025. (View our dashboard analysis Breaking Down Apple’s Services Revenue)  In comparison, we estimate that iPhone sales will stand at about $168 billion in the same period. (view our detailed valuation model for Apple for 7-year forecasts of iPhone sales) If we assume that the iPhone business maintains gross margins similar to Apple’s broader hardware operations (about 32% in FY’19) this would translate into iPhone gross profits to $53.7 billion in FY’25. In comparison, if we assume that services margins remain flat at about 63%, Apple’s services division could generate about $56 billion in profits. For more details on Apple’s services gross margins, view our analysis Why Are Apple’s Service Margins Trending Steadily Higher

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