Apple (AAPL) stock is up 50% so far this year, which many investors attribute to a potential phone supercycle, as customers upgrade to the sleek new iPhone X. But humbler parts of the business might be driving the shares higher, too.
In a Monday research note reviewing Apple’s 10-K filing of its annual financial results, UBS analyst Steven Milunovich points out that more than half of revenue growth over the past three quarters has come from services and “other products”. Services for Apple include app sales, movie rentals, extended warranties and digital payments. Its other-products category includes Apple TV, Apple Watch and accessories.
The watch received a significant upgrade in September that allows for making and receiving calls without help from a nearby iPhone. Accessories have gotten a boost from sales of AirPods, wireless earbuds announced in September 2016. In 2018, Apple will introduce a wireless pad that can charge an iPhone, Apple Watch and AirPods simultaneously.
To be sure, Apple remains highly dependent on the iPhone for success. Milunovich predicts 27% revenue growth for the device this fiscal year through September 2018, bringing it to 65% of total revenue. The following fiscal year, as the supercycle abates, he puts iPhone growth at just 2%. But services and other revenue by that year will continue growing at a mid-teens rate, and because both categories have higher profit margins than iPhones, that’s enough to send gross profit up 4% and total earnings per share up 7%–not bad for an off year.
That gradual shift–a rise in non-iPhone profit that helps to de-risk earnings in years between big iPhone upgrades–could explain the willingness of investors to pay a rising price for shares relative to earnings. The stock recently traded at 15.3 times forward earnings estimates, up from a five-year average of 12.5 times, but still well below the 18.1 level for the Standard & Poor’s 500 index.