Core Viewpoint - The era of Apple relying on iPhone as its profit pillar is coming to an end, with service business expected to surpass iPhone in annual gross profit contribution by fiscal year 2025 [1][3]. Group 1: Transition from Hardware to Services - Apple is undergoing a significant transition where its core profitability is shifting from hardware sales to service business [3]. - By fiscal year 2025, service business is projected to contribute 42% to Apple's annual gross profit, while iPhone's contribution will be 41%, marking the first time services surpass hardware [4]. - This gap is expected to widen by fiscal year 2027, with services contributing 44% and iPhone dropping to 39% [5]. Group 2: Profitability and Growth - The service business is anticipated to show faster revenue growth and higher gross margins compared to product sales, with service revenue expected to grow at a "low double-digit" rate (around 12%) while iPhone revenue is projected to grow at a "mid-single-digit" rate (around 6%) [11]. - The gross margin for service business is significantly higher at 75.6% compared to 34.5% for product business [11]. Group 3: Valuation Implications - The increase in profit contribution from the service business, which has higher margins and lower cyclicality, is expected to lead to a higher valuation multiple for Apple [9]. - The report emphasizes that a higher proportion of gross profit from stable, high-margin service revenue should warrant a higher valuation multiple [12]. - Analysts reaffirmed a "buy" rating for Apple with a target price of $250, supported by the transition to a more stable revenue model [12].

Core 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].