Apple’s next major source of revenue isn’t a gadget, according to one Wall Street firm.
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With a “stable iPhone business” serving as a base to drive customers, Apple Services, the software segment that includes the iCloud, App Store and Apple Music, could be a “massive, recurring and high margin” segment for the company, according to Jefferies analyst Timothy O’Shea. The firm projects that services could compose 25 percent of Apple’s business and 40 percent of its gross profit by the year 2022.
“Applying a higher multiple compared to the lower margin hardware business, we see a significant opportunity for investors as Services alone could be worth $111 to $177 per share,” O’Shea wrote.
Jefferies set a “Buy” rating for Apple’s stock and a $265 price target for company shares. Apple shares fell nearly 2 percent in trading Monday and closed at $212.24.
The App Store and Apple Music should drive revenue growth in the segment, O’Shea added. Apple Services revenue rose 31 percent year-over-year to $9.55 billion in the company’s most recent fiscal quarter.
Apple is one of several tech companies turning to software and cloud services to drive revenue. IBM announced its acquisition of open source cloud software firm Red Hat for $34 billion on Monday, in a deal it said established the “world’s number one hybrid cloud provider.”
Amazon Web Services, the e-commerce giant’s cloud computing platform, is one of its top-performing segments. AWS revenue jumped 46 percent to $6.7 billion when Amazon reported third-quarter earnings last week.