Why investors should look beyond Apple’s iPhone sales

Apple (AAPL) will report its Q3 2018 earnings on Tuesday and, naturally, all eyes will be on how many iPhones the tech giant sold in the quarter. And why not? The iPhone is the ultimate arbiter of Apple’s success.

It’s easy to understand why the number gets so much attention: The handset accounted for more than half of the company’s revenue in the previous quarter and has historically been the single most important data point for the firm.

But if you’re smart, you’ll also be looking at another number in Apple’s earnings report: its services revenue.

Apple’s future is bright

Apple itself predicts between $51.5 billion and $53.5 billion in revenue for the quarter, compared to $45.4 billion for the same quarter last year.

For a company that’s closing in on a $1 trillion market cap, it might sound obvious to say that its future looks bright — but let me explain. The number of iPhones Apple can sell will eventually plateau as the global smartphone market becomes more saturated. Sure, Apple will continue to sell new iPhones, but you can’t expect to see the kind of enormous growth the division has seen go on forever.

To satiate investors, Apple needs another monster growth opportunity, and that happens to be its services division. From Q4 2015 to Q2 2018, Apple’s services business, which includes the likes of iTunes, iCloud and Apple Music, has grown from $5 billion in revenue per quarter to more than $9 billion.

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