If you have been following Apple Inc. (NASDAQ:AAPL) stock, you might have noticed its cyclical fluctuations. As a smartphone maker, Apple stock’s appeal tends to increase when it releases a major “iPhone” and decrease when it doesn’t.
However, there could be more stability in AAPL stock. As the company expands its presence beyond the hardware business, the stock’s cyclical pattern could turn to a steady upward trend.
Let me explain.
The Most Overlooked Reason to Be Bullish on Apple Stock
In the past several years, Apple stock’s growth has mostly relied on the performance of the iPhone—the company’s core product. And there is a good reason for it. In its most recent fiscal quarter, iPhone sales totaled $51.6 billion, making up 68% of the company’s revenue. (Source: “Apple Inc. Q1 2016 Unaudited Summary Data,” Apple Inc., January 26, 2016.)
The neat thing is that as hardware sales shot through the roof, Apple also acquired a huge userbase for its software and services. The company does not use third-party operating systems. All its products—including the iPhone, “iPad,” “Macbook,” “iMac,” “iPod,” “Apple TV,” and “Apple Watch”—are powered by Apple’s own operating systems.
Here’s a number for you: one billion. That’s Apple’s active installed base of devices. The active installed base represents the number of devices that have been engaged with the company’s services in the past 90 days. In December, the number crossed the one billion mark. (Source: “Q1’16 Earnings Supplemental Material,” Apple Inc, January 26, 2016.)
The enormous size of Apple’s installed base means there is a huge market for the company’s service business. In the most recent fiscal quarter, Apple’s services revenue surged 26% year-over-year to $6.06 billion. Although the segment only represented a small fraction of the company’s total revenue, its growth could be huge. In the past four quarters, Apple’s services revenue has been increasing both year-over-year and sequentially.
Analysts have started to notice the strength and potential of this segment. Credit Suisse’s Kulbinder Garcha recently reiterated his “Outperform” rating on AAPL stock. The analyst also raised his price target from $140.00 to $150.00, implying a 36.5% potential upside in the company. (Source: “Apple: Credit Suisse Sees Rising Profit from Apple Music, Apple Pay, Etc.,” Barron’s, April 4, 2016.)
In particular, Garcha talked about the company’s one billion active devices, growing per-user spending on Apple’s services, and opportunities in the video market. He believes that gross profit from Apple’s services “could grow to $33.7 billion or 29% of gross profit by 2020.” Credit Suisse also added AAPL stock to its “U.S. Focus List,” noting that “the stock is now considered one of its top investment ideas.” (Source: Ibid.)
There is a good example of how Apple’s huge installed base helped it break into an already established service industry. I’m looking at “Apple Music,” the company’s music streaming service launched in June 2015.
Note that Apple wasn’t the first mover in the music streaming market. Back then, Spotify was running the show. But thanks to the massive installed base of Apple’s hardware products, Apple Music quickly turned into a big hit. The Financial Times reported in January that the service had achieved more than 10 million subscribers in just six months. How long did it take for Spotify to reach 10 million subscribers? A whopping six years. (Source: “Apple’s Music Streaming Subscribers Top 10M,” The Financial Times, January 10, 2016.)
The Bottom Line on AAPL Stock
In the short term, hardware devices will probably still be running the show for Apple. But in the long run, software and services could be a huge catalyst for AAPL stock.