Apple is both the world's largest company in terms of stock market weight, a trend leader and a major customer for a cascade of subcontractors. The iPhone has been key to its success. But since Apple announced it would not disclose how many iPhone units it sold during its fourth fiscal quarter, investors have feared that iPhone sales will continue to slow as the market reaches saturation.However, analysts at Jefferies believe that we shouldn't worry: services will be where Apple will be making most of its money for the foreseeable future.

“Our detailed, bottoms-up services build suggests a 5-year revenue CAGR of 19 % (vs -1% for iPhone)“, says analyst Timothy O’Shea. Jefferies believe that Apple intends to tell a compelling services story when it discloses gross margin for the first time ever next earnings. It anticipates that Services will pull off a gross margin between 60-66%, above consensus of 56%. 

The company models App Store growing from $13 billion in 2018 to over $32 billion in 2023 (19% 5-yr CAGR), with 80% gross margin. Apple Music is forecast to be growing much faster, from $3.7 billion in 2018 to $16 billion in 2023 (34% 5-yr CAGR), but with lower gross margin of 19%.
 


 
 

“The opportunity for investors is that these higher margin, higher growth software businesses deserve a higher multiple vs the lower margin, lower growth hardware business”, says Jefferies, which anticipates that services will continue to grow to deliver 41% of gross profit by 2023.
 

However, its optimism around Services is offset by reduced expectations for iPhone. It is lowering 2019 iPhone unit, iPhone revenue and EPS estimates by 3%, 3%, and 4%, respectively. It now expects Apple will sell 71.7MM iPhones in the first quarter of 2019 and 206MM for the full year, below the consensus (74MM/210MM). But Jefferies concludes: “while we are reducing iPhone and EPS estimates for F'19, Apple's iPhone business still looks sufficient to build a massive, high margin, high multiple Services business over time.”