Apple(US:AAPL) Hua Er Jie Jian Wen·2025-08-18 01:08Core Insights - Apple is undergoing a significant transformation, with its services business projected to surpass iPhone as the largest contributor to gross profit starting in fiscal year 2025 [1][2]. Group 1: Financial Projections - In fiscal year 2025, the services segment is expected to contribute 42% of Apple's annual gross profit, while iPhone's contribution will be 41%, marking the first time services surpass iPhone [2]. - By fiscal year 2027, the services contribution is anticipated to rise to 44%, while iPhone's share is expected to decline to 39% [2]. Group 2: Growth Drivers - The growth of the services business is driven by faster revenue growth and higher gross margins compared to product sales, leading to a greater contribution to year-over-year gross profit [3]. - The services business boasts a gross margin of 75.6% in Q3 of fiscal year 2025, significantly higher than the 34.5% margin for product sales [8]. Group 3: Profit Quality and Valuation - The transition from cyclical iPhone sales to more stable and predictable service revenue enhances Apple's cash flow and profit elasticity, supporting a higher valuation multiple [9]. - The overall gross margin is expected to approach 50% due to the optimization of the business mix, with a larger share of profits coming from the stable, high-margin services segment [9]. - Bank of America maintains a "buy" rating on Apple with a target price of $250, based on the anticipated growth and profitability of the services business [6][9].