Not many analysts emphasize the importance of Apple Inc.’s (NASDAQ:AAPL) cloud business, but it could be one of the main but relatively under-the-radar reasons to own the stock.
Long-time followers of the company may recall that Apple’s ‘iTunes’ ecosystem helped the company to retain many of its customers years ago but its next must-have feature for users could be its cloud storage. Other reasons for owning shares of Apple include its $256 billion in cash, a new iPhone launch planned for the fall, a 10% increase in its dividend payout and a $1 billion “advanced manufacturing fund” that could lead to Apple to build iPhones or other devices in the United States.
Nonetheless, the cloud‘s importance to Apple’s future is growing. Currently, Apple offers 5GB of free cloud storage and then charges $0.99 to $19.99 per month, depending on what cloud package customers order. What is so beautiful about the cloud business is that once Apple has a customer hooked, it is very unlikely that user will reduce the amount of storage space or leave Apple and the iPhone all together because the cost of switching to a different provider would be high.
Similar to how music downloaded on iTunes kept customers connected to Apple’s ecosystem, the cloud storage business appears to be doing the same thing. Moving forward, many experts are expecting cloud storage to increase in popularity along with the use of data, including precious photos, users want to save.
That trend would continue not only to intertwine customer’s lives with Apple, but boost the revenues and profits of Apple’s “service” unit, which encompasses cloud storage.
Apple’s “service” business
In addition, with the company’s planned iPhone 8 upgrade coming this fall, it shouldn’t be a surprise to see a big spike in Apple’s cloud business as customers seek to save photos and videos when upgrading from one phone to the next. The upgrade cycle will likely be a big catalyst for Apple’s “service” business.
Years ago, Apple changed the way many people listened to music with the advent of iTunes. During a time when free illegal downloading of sounds was destroying the music industry, Apple came along and started charging $1 to download a song. It helped to launch iTunes and turned out to be a stroke of genius.
While the iPhone may have been Apple’s best product, both in terms of dollar sales and margins, iTunes was the reason people kept buying new iPhones and remained loyal to the Apple brand. Today, downloading music is no longer as popular, but Apple’s cloud storage gives its customers another reason to keep subscribing and buying iPhones.
In the most recent quarter, Apple reported its “services” unit posted revenue of $7.04 billion, an 18% increase from the same quarter a year earlier. The prior quarterly results reported in February, Apple posted a similar $7 billion in “services” revenue. Services is Apple’s second largest revenue producing unit, behind only the iPhone, and topping its Mac and iPad units.
While the services unit is not completely made up of cloud storage, it has been noted by top Apple executives, including CEO Tim Cook, as a promising growth area due in large part to its cloud business.
Matt Thalman has been writing since 2011, shortly after gaining his MBA, but his love for the markets began in undergrad when he first learned about the awesome power of compound interest. Thalman mainly focuses on consumer-facing stocks and general investing topics, but will also cover other areas of the markets if he believes there is something important investors need to know. Follow him on Twitter @mthalman5513.
At the time of this writing, Matt Thalman owned shares of Verizon, Amazon.com, Netflix, and Tesla.