A forgettable year is coming to an end an apple (AAPL 2.38%) investors who faced the broader stock market sell-off despite the firm’s resilient performance amid a weak stock market. But 2023 could turn out to be a much better year for the tech giant, as one of its key businesses is likely to step on the gas.
We know that Apple gets most of its revenue by selling products like the iPhone, the iPad, MacBooks and other devices, but its service business pays a lot for the company. In fiscal 2022 (which ended September 24, 2022), Apple reported $78 billion in services. The segment’s revenue jumped 14% year over year and accounted for nearly 20% of the company’s top line.
Apple seems to support the tremendous growth of its services business in 2023. Let’s see why this may be the case and how the growth of the segment could help the company’s bottom line.
The services business moves the needle significantly for Apple
Apple had a massive installed base of 1.8 billion active devices at the end of the first quarter of fiscal 2022. Although the company hasn’t updated that number recently, CEO Tim Cook did point out on the October earnings call that Apple has set “another.” record on our installed base of active devices, thanks to a quarterly record of upgraders and double-digit growth in switches on iPhone.”
So it won’t be surprising to see the company sitting on an installed base of 2 billion active devices, given the healthy demand for iPhone and other devices. A larger base of installed devices means that Apple can sell its services to more users. This explains why the company’s service revenue grew faster than its product revenue.
In fiscal 2022, Apple’s product revenue increased just 6% year over year. But the growing adoption of the company’s comprehensive services (applications, music, games, television, cloud and others), allowed it to end the fiscal year with a 7.7% increase in revenue over the previous year. In addition, Apple reported a 9% year-over-year increase in its adjusted earnings per share to $6.11 per share, outpacing its revenue growth thanks to the higher margin profile of the services business.
More specifically, Apple’s services business delivered a gross margin of 70.5% last quarter. That’s more than double the product gross margin of 34.6% and significantly higher than Apple’s overall gross margin of 42.3% last quarter. So the growing influence of Apple’s services business should translate into solid trailing earnings in 2023 and beyond.
The good news is that Apple’s active device installed base could continue to grow at a nice clip in 2023, and that should positively impact the service business.
Why the service business could continue to grow in 2023
IDC estimates that 233.5 million iPhones may be shipped in 2023, which would be a slight increase over this year’s estimated production target of 220 million units. This also suggests that the installed device base is expanding again next year.
However, a new Apple product could give its installed base a significant boost in 2023 and beyond. Supply chain gossip suggests Apple could launch an augmented reality/virtual reality (AR/VR) headset in 2023. Rumors suggest the tech giant could make 500,000 units of its mixed reality headset in the new year, with each unit expected to be priced at around $2,000.
Assuming Apple can sell all these rumored headphones, it could generate a billion dollars in revenue from a new product line next year. But the bigger play for the company would still be the service business. The company is said to be working on delivering 3D content through its headsets, according to Bloomberg, with one job listing suggesting it may develop a virtual environment similar to the metaverse.
So a mixed reality headset could add another dimension to Apple’s services. The device will help the company mark its presence in a market that is expected to take off nicely in the long run. A third estimate predicts that the mixed reality headset market could generate $19.5 billion in revenue by 2026 compared to about $5.6 billion this year. The growth in sales of mixed reality hardware should open the door for the likes of Apple to sell more services next year.
All of this indicates that Apple’s services business is built for long-term growth. It will not be surprising to see this segment move closer to $100 billion in revenue in 2023, per Morgan Stanley assessment That could help Apple beat Wall Street expectations in the new year and send its stock soaring, so investors may want to take advantage of the 25% decline this tech stock has witnessed in 2022 and buy it before it explodes.
Harsh Chauhan has no position in any of the said stocks. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
