Written by Norman Isaac Mwambazi

Apple’s five most profitable lines of business

Apple Inc. became the first U.S. Corporation to surpass $1 trillion in market capitalization in 2018 and it has remained …

Apple Inc. became the first U.S. Corporation to surpass $1 trillion in market capitalization in 2018 and it has remained the most valuable company in the world to date with a market capitalisation of $2.05 trillion.

Apple’s remarkable growth in sales, profits, and share price, which is currently trading at $121.86 after splitting five times, have historically been driven by solid sales of its flagship product, the iPhone smartphone.

However, sales of the iPhone and other technology hardware devices have slowed down in the last couple of years forcing the company to aggressively transform itself into one of the world’s leading providers of digital services.

In FY2019, more popular Apple products like the iPhone and MacBook laptops fetched lower earnings compared to what they fetched in FY2018, but the shortfall was compensated by revenue from services. In case you are wondering what constitutes Apple’s services business, wonder no more. The App Store and Apple Music lead the company’s services business line.

Revenues

In May 2019, Michael Olson, an analyst at Piper Jaffray claimed that Apple had put more emphasis to develop its service business so much that it was worth $502 billion. Olson reached this figure through an analysis that assesses the value of each business unit and then combines them together for an overall valuation estimate.

The analyst also estimated that Apple’s hardware business was only worth $398.8 billion making Apple’s services business worth more than its hardware business.

In FY2019, Apple reported sales of $260.17 billion on a net income of $55.25 billion. In Q1 FY2019, the company’s Earnings Per Share (EPS) was $4.18 and this was a record high for the company at that time. EPS rose to $4.99 in Q1 FY2020.

In the same fiscal year (2019), Apple’s iPhone business accounted for approximately 54.7% of total sales, services segment made up approximately 17.7% of revenue, ahead of MacBook sales, which generated 9.8% of total revenue. The wearables, home, and accessories segment comprised 9.4% of sales and the iPad came in last with 8.1% of total revenue.

With that, you could already be having a blurry picture of Apple’s most profitable line of business but let me make it clearer for you with the company’s top five profitable business lines.  

Apple’s five most profitable business lines

iPhone

Apple's five most profitable lines of business

This is a no brainer. Apple’s flagship and most popular product, the iPhone, has been ranked amongst the top five smartphone vendors in the world since 2009.

For Q1 FY2020 that ended on December 28, 2019, iPhone sales were $55.96 billion. Overall, Apple’s reported profit and revenue for the quarter outperformed Wall Street analysts expectations and this was partially attributed to the popularity of the new iPhone models.

The first quarter of the fiscal year is a very important period for Apple because it covers the holiday season and the three most lucrative months of the year, that is, October, November, and December.

In previous quarters, any decline in iPhone sales has been attributed to a slowdown in China that is a big market for these phones, a longer iPhone replacement cycle, and stiff competition in the global smartphone market particularly Samsung and those on the Android platform.

Apple’s ‌iPhone 11‌ has become Apple’s best-selling smartphone since it launched and we are waiting to see if the iPhone 12 that was released last year will outperform it.

Regarding Apple’s Q1 FY2020 holiday performance, CEO Tim Cook said, “We are thrilled to report Apple’s highest quarterly revenue ever, fuelled by strong demand for our iPhone 11 and iPhone 11 Pro models, and all-time records for Services and Wearables.”

Services

Apple's five most profitable lines of business

Apple’s services segment posted revenue of $46.3 billion in FY2019 and $12.72 billion for the Q1 FY2020. In FY2019, Apple’s services business posted gross margins of 63.7%, almost double the 32.2% gross margin of the company’s product sector.

As a whole, Apple’s subscription business (including subscription apps) grew 40% year-over-year. This revenue comes from selling a range of services like Apple Music subscriptions, iCloud storage services, and AppleCare warranties. According to Apple, there are over 450 million paid subscriptions on Apple’s platform.

Over the years, there has been a steady growth of revenue for Apple’s services business from $5.2 in 2010 to nearly doubling to $10.2 over the next two years, and skyrocketing to $46.3 billion by the end of FY2019.

This is why Apple’s Chief Executive Officer (CEO) Tim Cook has made it a goal to speed up that growth. Recently, there have been several additions to Apple’s services business, including a streaming movie and TV service (Apple TV+), a new video game subscription (Apple Arcade), and the Apple Card, which will compete against other financial payment giants.

The performance of some of these new services is reflected for the first time in the financial results for Q1 2020.

Mac

Apple's five most profitable lines of business

Apple’s personal computer business, which is built around the Mac, generated sales of $25.7 billion in FY2019. Mac’s contribution to Apple’s growth has consistently fallen as the personal computer industry has experienced slowing demand worldwide.

For Q4 FY2019, Mac products only accounted for approximately 11% of the company’s total revenue. However, from a strategic perspective, Apple’s personal computer business is very important for the company because it is part of a broad, interlinked product family running on the iOS operating system.

iPad

Apple's five most profitable lines of business

When Apple launched its iPad in 2010, it quickly became the first commercially successful tablet computer to hit the market. In the first three months after it was released, the device sold more than three million units. As of the fourth quarter of 2019, the iPad held a 36.5 % share of the global tablet market. In the fiscal year 2019, iPad sales came in at $21.3 billion.

Wearables, Home, and Accessories

Apple's five most profitable lines of business

Apple’s Wearables, Home and Accessories segment is made up of devices such as AirPods, Apple Watch, and HomePods. The segment posted $24.5 billion in sales in FY2019. Apple has been ramping up the release of products in this category.

The second generation of AirPods, the company’s popular wireless headphones, launched in the first half of 2019 and the noise-cancelling AirPod Pro wireless headphones launched in October 2019.

PS: Stock prices quoted in this article can change any time.