The iPhone is still Apple Inc’s (NASDAQ:AAPL) big money-maker but Wall Street analysts like how the tech giant is reducing its reliance on the smartphone business.
In Tuesday’s after-hours fiscal second-quarter earnings release, Apple reported revenue of US$61.1bn and earnings of US$2.73 a share – both ahead of consensus.
READ: Apple announces US$100bn buyback as 2Q earnings beat estimates
The higher prices of the iPhone X and iPhone 8 helped to offset a slight miss on unit sales, with total iPhone sales climbing to US$38.0bn in the quarter.
That means the iPhone is now responsible for just over 60% of Apple’s revenue; slightly lower than the year-ago period which itself was an improvement on the year before.
Picking up the slack has been the nascent services business, so things like iCloud, Apple Music and the App Store.
Revenue from that division surged to US$9.1bn, beating last year’s figure of US$8.5bn and Wall Street forecasts of US$8.4bn.
Being too reliant on one product has its obvious pitfalls but there are also perhaps ‘hidden’ benefits to generating more sales from the services business.
For example, people who have purchased lots of apps on the App Store or who have signed up with Apple Music are much more likely to continue to stick with Apple in the future.
Wall Street analysts have praised the work Apple has put in to developing its other businesses away from the iPhone.
“There is increasing revenue balance as the iPhone matures with services and wearables picking up some slack,” wrote UBS’s Steven Milunovich.
“Services growth of 31% was impressive – Apple should reach its goal of doubling services over four years organically.”
US$50bn in services revenue ‘by 2019’
Morgan Stanley number cruncher Katy Huberty thinks Apple might hit its US$50bn of annual services revenue in early 2019 rather than its previous guidance of 2020.
“We don't see Services growth slowing anytime soon given the many growth levers, including: 1) fewer than half of users pay for services and the paying customer base is growing strong double-digits.2) a broadening data center footprint and new payment methods improve the services experience, and 3) strong growth in relatively nascent services like Music and Pay along with upcoming services like Video.”
Deutsche Bank’s Sherri Scribner upped her price target for the stock to US$165 from US$152.
In a note to clients, the analyst said she was encouraged by the strength in services and wearables, while iPhone sales weren’t as bad as she had feared.