This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- Apple's revenue growth has picked up in recent quarters.
- The tech giant's high-margin services business now represents a substantial portion of total profits.
- Strong guidance and an emerging AI hardware upgrade story help explain why the stock trades at such a high valuation.
After a sharp rally in recent months, Apple (NASDAQ: AAPL) shares look expensive. The iPhone maker's stock has climbed to fresh highs, reflecting investors' growing confidence that the company has emerged from its growth lull and is heading into a stronger product and earnings cycle.
Apple is still a hardware-focused business, but the story now leans more on services and the steady influence of its installed base. That shift, together with a clearer artificial intelligence road map, helps explain why the stock still carries a premium valuation.
1. Growth is back on track
After a sluggish stretch last year, Apple's revenue has begun to reaccelerate. Revenue grew 4%, 5%, 0%, and then 8% year over year across the four quarters of fiscal 2025 (respectively), lifting full-year growth to more than 6% from just 2% growth in fiscal 2024.
Importantly, this accelerated growth was driven by both hardware and services revenue.
2. A powerful iPhone 17 cycle
The current iPhone 17 cycle is a key driver of that rebound. iPhone revenue grew double digits year over year in the third quarter of fiscal 2025 and increased again in the fourth quarter as the new iPhone 17 lineup launched. Of course, the new iPhone models were available only for a few weeks during the fiscal fourth quarter. So, the real test will be during the important holiday period, which aligns with Apple's first quarter of fiscal 2026 (the current quarter).
But based on management's comments on the latest iPhone models in the company's fiscal fourth-quarter earnings call, we already know the iPhone 17 is probably going to do well this holiday season. "We're constrained today on several models of the iPhone 17," said Apple CEO Tim Cook in the company's latest earnings call. "There's not a ramp issue. It's just we have very strong demand and we're working very hard to fulfill all the orders that we have."
In addition, management specifically guided for double-digit year-over-year growth in iPhone revenue for the period.
3. Services tilt the business toward higher margins
Apple's important services business, which is home to the App Store, Apple's native apps like Apple Music and Apple TV, and other services such as AppleCare, continues to grow faster than the rest of the company and carries a much higher gross margin than hardware sales. In the fourth quarter of fiscal 2025, services revenue grew 15% year over year, compared with 8% for the company as a whole. In addition, the important segment represented close to 30% of total revenue during the quarter.
That shift toward recurring revenue sources in Apple's services business, including app store fees, cloud storage, payments, advertising, and subscriptions, should make Apple's business more resilient and -- importantly -- more profitable. After all, Apple's services business commands a gross margin of about twice that of the company's hardware business.
4. Guidance signals more momentum
Management's outlook adds another pillar to the bullish case. For the current quarter ending in December, Apple expects total revenue to grow 10% to 12% year over year, and iPhone revenue to grow at a double-digit rate.
Viewing this guidance in light of the company's recent acceleration in the back half of fiscal 2025, that guidance suggests the current momentum is not just a one-quarter blip tied to product timing but something more sustainable.
5. AI as a future catalyst
The final reason many investors remain comfortable owning Apple at a premium multiple is the potential for artificial intelligence (AI) to drive another hardware upgrade cycle. Apple has talked more openly this year about integrating AI across devices, from on-device models that power smarter photo and messaging features to a revamped Siri expected in 2026.
The company has begun to ramp up capital spending and AI-related research and development. If AI features start to require more powerful devices better suited for fast-changing computing needs, Apple is positioned to capture that demand through new products in existing product lines and potentially even entirely new product lines enabled by AI.
Taken together, these five pillars help explain why the market is willing to pay a rich price for Apple shares and why I personally remain bullish on the stock over the long haul.
Trading at around 32 times forward earnings, the stock isn't cheap, and any unexpected setbacks in iPhone demand or services growth could pressure that multiple -- especially if AI initiatives disappoint. Still, I believe the upside opportunity outweighs the risks.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
