This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
With a market capitalization of just under $3 trillion, Apple (NASDAQ: AAPL) holds the title of the world's most valuable company. Its brand has tremendous value, with consumers across the globe paying premium prices for its products. Even Warren Buffett recognizes Apple's quality, as it's the largest stock position in Berkshire Hathaway's equity portfolio.
Given all that, nearly every investor will be familiar with Apple. But you might be overlooking one lesser-known fact about the company.
Taking share from hardware
Apple generated $391 billion in sales in its fiscal 2024 (which ended Sept. 28). Of that figure, 75% was derived from products, which include its popular iPhone, iPad, Apple Watch, and Mac lineups, among other items. And with almost 2.4 billion active Apple devices in use all over the world as of its fiscal 2025 first quarter (ended Dec. 28), those are probably the first things that come to mind when consumers and investors think of the company.
However, the composition of its sales mix is changing. Its services segment accounted for the other 25% of sales last fiscal year, totaling $96 billion. That number has increased at a compound annual rate of 15.7% in the last five years, a much faster growth pace than products registered. As a result, the share of revenue being derived from services is increasing over time, and that trend is likely to continue.
The services division covers a wide range of offerings. Apple Music, Apple TV+, iCloud, AppleCare, the App Store, Apple Fitness+, Apple News+, Apple Arcade, Apple Pay, Apple Card, and digital advertising all fall in this segment. In reality, the company is one of the leading digital platforms on Earth, and that gives it a sizable recurring revenue stream.
"We also see increased customer engagement with our services offerings," CFO Kevan Parekh said on the Q1 2025 earnings call. "Both transacting and paid accounts reached new all-time highs. ... We have well over a billion paid subscriptions across the services on our platform."
While that scale is impressive, profitability is worth highlighting here. Services reported a gross margin of 75% in Q1 2025. That was significantly higher than the 39% gross margin for products. Theoretically, more revenue from services should result in a fatter bottom line, all other things being equal.
Apple's services help round out its offerings, and combined with hardware devices, they create an ecosystem that promotes loyalty and essentially locks users in.
Should you buy Apple stock?
Every existing Apple shareholder and prospective investor certainly needs to understand the importance of the services segment to the company. However, it's hard to argue with the fact that Apple remains a hardware company first, with the iPhone in particular driving its financial performance. Its smartphone line provided 56% of its revenue in Q1.
This is not as positive of a force as it used to be. That's because iPhone sales slipped by 1% year over year last quarter. Even the introduction of Apple Intelligence, a suite of artificial intelligence (AI) features that help users get greater utility out of their devices -- and that is only available on the newer iPhone models -- hasn't jolted demand like the bulls hoped.
Taking a step back, there's been a trend of more incremental feature upgrades with newer iPhones. That doesn't exactly provide much encouragement to consumers to upgrade. What's more, heightened economic uncertainty could put further downward pressure on sales.
Nor is the stock much of a bargain, trading at a price-to-earnings ratio of about 32. That's 40% more expensive than the trailing 10-year average. This could limit the stock's return potential for new investors.
To be fair, Apple remains one of the world's elite businesses, with a powerful brand, unmatched customer loyalty, a culture of innovation, and incredible profitability. It's just not worthy of your investment dollars right now.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
