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In the past five years, the S&P 500 (SNPINDEX: ^GSPC) has generated a total return of 92% (as of Jan. 14). That's a fantastic gain that's above the historical average.
A strong market backdrop has lifted Apple (NASDAQ: AAPL) even further. The tech giant's shares would have more than tripled your money since the middle of January 2020, including dividends.
The business continues to be a dominant force across the globe. But where will this consumer discretionary stock be five years from now?
Hardware is important
Apple is known for selling popular hardware devices. The iPhone, which today represents about half of overall sales, even though it's a product in its 16th iteration, still essentially drives financial performance. However, the company has also developed and found smashing success with the MacBook, iPad, AirPods, and Watch.
Five years ago in fiscal 2019, 82% of Apple's total revenue came strictly from products. That's not necessarily a bad thing, as consumers all over the world have grown an affinity to these devices. That's precisely what has made Apple the most valuable brand, according to consultancy Interbrand.
And it has supported pricing power. It's crazy to think that people will pay a four-figure sum for a smartphone. Apple has single-handedly redefined the category, and it continues to reap the rewards in the form of massive profits.
A shifting business model
But Apple's business model is transitioning. In fiscal 2024, 75% of total revenue came from products, with the rest coming from services. The latter segment's dollar amount, however, of $96 billion is 108% higher than five years before, a much faster growth rate than products registered. This segment contains a wide range of money-making activities, including iCloud, advertising, AppleCare, App Store, Apple TV+, Apple Fitness+, Apple Music, Apple Arcade, Apple Pay, and Apple Card.
It's encouraging to see the company evolve like this. After all, Apple's services, in combination with products, are what make up the powerful ecosystem. It builds customer loyalty and creates a bigger recurring revenue stream over time.
Investors were worried that Apple would fall behind the artificial intelligence (AI) race. But the business finally launched Apple Intelligence, a suite of AI-related features, late last year. At the end of the day, though, it still matters greatly that this initiative can drive more product sales. This ultimately leads to those devices subscribing to an Apple service.
I believe it's reasonable to assume that services and software will become even more important to Apple's financial success over time, meaning the trend will continue. This is a good thing, as the division carries a gross margin in excess of 70%.