AAPL: Forget the iPhone—Services Will Drive the Next Phase of Growth

Summary

Shares of Apple Inc NASDAQ: AAPL have been on an impressive run in recent weeks, breaking through $300 for the first time last week. It means they're now up more than 20% since the start of April, finally rallying after months of range-bound trading. Apple Today$297.07 -0.77 (-0.26%) As of 12:25 PM Eastern This is a fair market value price provided by Massive. Learn more.52-Week Range$193.46▼$303.20Dividend Yield0.36%P/E Ratio35.88Price Target$308.74 The broader bull case that has fuelled this move has been well documented—a blowout earnings report, double-digit revenue growth, a massive $100 billion buyback, and a market that has firmly shifted back into risk-on mode. What's received considerably less attention, though, is the argument that Apple may still be significantly undervalued in one very specific part of its business. A fresh note from Evercore ISI last week argued that the company's Services segment, which generated nearly $31 billion in revenue in its most recent quarter, is being priced by the market as if it were a hardware business. The analysts believe that if it were valued more appropriately, as a high-margin, recurring-revenue software operation, it could add as much as $13 per share to Apple's stock price on its own. Considering Apple is currently selling record numbers of its iconic iPhone, that's an interesting take worth taking seriously. Why Services Is Becoming Impossible to IgnoreThe core of Evercore's argument isn't complicated, and that's part of what makes it so compelling. According to analyst Amit Daryanani, Apple's Services division, which covers the App Store, Apple Music, iCloud, Apple TV+, Apple Pay, and a growing suite of subscription products, isn't growing like a hardware business; it's growing like a software one. More importantly, the margin profile tells a very different story from the iPhone business. Services carries dramatically higher gross margins than hardware, meaning every incremental dollar of Services revenue benefi...