This under-the-radar Apple business is growing by leaps and bounds

Not every business has to be the size of the iPhone to be a winner.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

There's little question the iPhone remains both the flagship product and the chief money maker for Apple (NASDAQ: AAPL). The device accounted for roughly 52% of the tech giant's sales over the past 12 months, just as it did during the prior-year period. The popularity of the iPhone makes it difficult for any other product or service to move the needle for the company.

That said, Apple has an under-the-radar service that has quietly, and without much fanfare, become one of the company's fastest-growing revenue streams.

How do you want to pay for that?

Most investors don't even give Apple Pay a second thought, yet the iPhone's digital payment method has risen from relative obscurity when it was introduced in late 2014 to being indispensable for a large and growing number of iPhone users.

Consider this: About 10% of iPhone users had activated Apple Pay by 2016, according to research provided by venture capital firm Loup Ventures. That percentage doubled in 2017 and again in 2018. By 2020, activations had risen to 50%. The need for touch-free payment methods during the pandemic drove a surge of use, pushing activations to 75%. It's worth noting that just because Apple Pay is activated doesn't necessarily mean it's being used, but the trend is undeniable.

Apple Pay is also much more widely accepted now than it was in the early days. When it was introduced, only about 3% of retailers had the technology necessary to accept contactless payments. Now roughly 90% of merchants in the U.S. accept Apple Pay. 

Perhaps more importantly, Apple Pay is the leading payment app among teens, outpacing even PayPal's Venmo, according to Piper Sandler's semiannual Taking Stock With Teens survey. This suggests that Apple Pay could become even bigger as members of Generation Z -- the largest demographic yet -- become the primary breadwinners. 

Move the needle? Not bloody likely.

So what does this mean for Apple in terms of revenue? The truth is that given the massive size of its iPhone business -- which generated more than $200 billion in sales over the last 12 months -- it's unlikely that any other single business will move the needle for Apple, but the numbers are compelling nonetheless. Apple Pay generates billions of dollars in revenue for the iPhone maker. 

Apple's total revenue amounted to more than $387 billion over the trailing 12-month period. The company doesn't provide specific details regarding Apple Pay's contribution, but estimates suggest it accounts for roughly 1% of the total, or $3.88 billion, according to Loup Ventures. 

That's not all. While the U.S. has long lagged other developed nations in contactless payments, its overall adoption has reached a tipping point. This is thanks in part to pandemic-related safety protocols and greater acceptance of touchless payments by consumers.

A bigger piece of a growing pie

In its first-quarter earnings call, Visa (NYSE: V) revealed that it is "nearing 20% tap-to-pay penetration with key metro cities showing even stronger growth." The company said that a host of large cities, including Los Angeles, Miami, and Seattle, all exceeded 25% penetration. San Francisco, San Jose, and Oakland had surpassed 30%, and New York topped the list at 45%. This suggests that the overall adoption of touch-free payments is growing and Apple is well-positioned to reap the rewards.

Apple's influence isn't limited to the U.S. Early last year, the company reported it had a base of more than 1 billion active iPhones worldwide, a number that has no doubt increased in the year and a half since. Furthermore, Apple Pay is supported in 73 countries and regions around the world, a list that grows larger each year.

The iPhone will remain Apple's primary breadwinner for the foreseeable future. That said, Apple Pay is just one piece of a large and growing puzzle that should help drive Apple stock higher for years to come.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Danny Vena has positions in Apple and PayPal Holdings and has the following options: long January 2024 $95 calls on PayPal Holdings. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, PayPal Holdings, and Visa. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple and PayPal Holdings. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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