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Apple has a surprising new growth engine

Tim Cook, chief executive officer of Apple
Michel Porro | Getty Images
Tim Cook, chief executive officer of Apple

The observant Apple analyst Toni Sacconaghi of Bernstein Research put out a pointed note Monday about Apple's growing services business. Two of his projections jumped out at me.

The first was in his headline: He estimates that through licensing deals to secure its search engine as the default option on Apple's phones, Google will pay Apple $3 billion in fees in Apple's fiscal year 2017. That's all practically pure profit, Sacconaghi notes, and shows the power of Apple's premium product reach.

The second data point he shares is the growing power of Apple's services business. He forecasts it will be 13% of Apple's overall revenue this year and that it's growing at a pace of 19% year over year. A couple years ago, when Apple CEO Tim Cook started talking up Apple's services revenue—largely millions of tiny purchases of songs on iTunes and apps in Apple's App Store—critics assumed this was a smokescreen to distract from weakening hardware sales. The fact is that Apple's services business, more profitable even than hardware, is becoming a growth engine for the company.

Sacconaghi speculates on how Apple's business could grow further, primarily if other advertising and e-commerce apps are also willing to pay up for preferred placement. What he doesn't touch is what other types of services Apple might one day offer, given its vast database of consumer's credit card information. Google, for example, is widely believed to covet the ride-hailing market controlled in the U.S. by Uber and Lyft. And Amazon is thought to be eyeing that market too, more from a package delivery system than a human transportation platform. How might Apple, newly muscular as a service provider, view such an opportunity?

One last fact about Apple can't be ignored. Sacconaghi, who maintains a price target of $175 on Apple's shares, which closed Monday a hair under $160, notes that Apple's valuation is lower than its peers as well as IBM. That's just nuts.

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