Apple's business is way more dependent on the iPhone than you might think

By Emily Bary

Apple gets about half of its revenue directly from iPhone sales. But the product is indirectly responsible for far more than that, according to one analyst.

By one analyst's math, Apple Inc. is expected to generate about $215 billion in iPhone revenue, or just over half of the overall company total, in the next fiscal year.

But is that the full extent of the iPhone's impact on Apple's (AAPL) business? Not even close, according to Needham.

Millions of people likely own iPhones but no other Apple products, Needham analyst Laura Martin wrote Tuesday. Yet even those iPhone wielders often generate revenue for Apple in other ways.

See also: Apple iPhone 16 is now on sale, and T-Mobile's CEO says it's selling better than last year's

She estimates Apple could haul in $108 billion in services revenue next fiscal year, representing just over a quarter of overall revenue. And 100% of that services revenue is dependent on iPhone ownership, in her view. The services business includes various things, including streaming offerings like Apple TV+ and Apple Music, as well as insurance and the App Store.

Then there are Apple's other products, which she expects to together generate $97 billion in revenue next fiscal year. Martin thinks that ownership of those products is highly dependent on whether consumers also have iPhones, to the extent that perhaps 50% to 80% of people would "churn out" of these other product categories if they stopped using an iPhone.

For that reason, she calculates that 89% to 96% of Apple's revenue is linked to iPhone ownership.

Read: Was Apple's iPhone 16 event a dud? There's underrated good news for investors.

What does that mean for Apple investors? "We worry that [Apple] is a hardware company, in an era of software disruption," Martin wrote.

She noted that fellow large technology companies Alphabet Inc. (GOOG) (GOOGL), Meta Platforms Inc. (META) and Microsoft Corp. (MSFT) are far more rooted in software. Meanwhile, Martin said she's concerned that "hardware introductions like the Vision Pro are evidence that [Apple] feels more comfortable solving difficult hardware problems, even if they are irrelevant."

Furthermore, "portfolio theory says that diversification lowers risks," according to Martin. She asks whether Wall Street is discounting Apple shares enough to account for the heavy reliance on the iPhone.

Even so, she remains bullish on Apple shares, with a buy rating and $260 target price that's 15% above current levels.

"Investors need a liquid stock to hide in during 2025," as Amazon.com Inc. (AMZN), Alphabet, Meta and Microsoft continue to invest heavily in generative artificial-intelligence infrastructure and large-language models that bring "no visible [revenue] upside," she wrote.

Additionally, Martin is upbeat about Apple's robust stock-buyback program, which is poised to help drive meaningful growth in earnings per share in the next two years.

Opinion: Apple investors get a raw deal with iPhone 16 - but customers get a bargain

-Emily Bary

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09-24-24 1228ET

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