Apple’s burgeoning Services division could make up 40 percent of the company’s gross profits by fiscal 2020, predicts Jefferies analyst Timothy O’Shea.
O’Shea says that Apple’s growing Services are the creamy sweet icing (not exactly his words) on top of the cake that is the existing “stable” iPhone business. As a result, he puts a price target of $265 a share on the Cupertino giant.
“We believe AAPL’s stable iPhone business will serve as the foundation upon which it can build a massive, recurring and high margin Services business,” O’Shea wrote.
O’Shea thinks that the Services business — which includes the likes of the App Store, Apple Music, iTunes, and iCloud — will represent 25 percent of Apple’s revenue by 2020. However, this figure increases to 40 percent of the company’s overall gross profits. Gross profit refers to is a company’s profit before operating expenses, interest payments and taxes.
“Services growth will be led by App Store and Apple Music, and we see an opportunity to introduce new services over time,” O’Shea said.
The rise of Services
Apple’s Services division has been growing larger for some time now. It is now considerably bigger than Apple’s individual Apple Watch, iPad and Mac businesses. Earlier this year, analyst Katy Huberty described Services as, “fast becoming Apple’s primary growth driver.” In 2017, Apple officially added Services to its official description of growth areas it works in.
While O’Shea believes that the App Store and Apple Music are the biggest parts of Apple’s Services division, there are other opportunities, too. For instance, Apple is currently spending upwards of $1 billion on original video content, which it hasn’t revealed how it will distribute to customers.