Why The Services Bull Case Is Starting To Crack At Apple

Go back to 2018. Apple disclosed an active device installed base for the first time and told the market it would stop reporting iPhone unit volumes. That moment was the pivot. The company wanted investors to stop looking at hardware cycles and start thinking about recurring revenue per user. The Services segment became the vehicle for that reframing.

It worked. The multiple expanded from the mid-teens to the low thirties. Services revenue grew at a blistering 20 percent plus clip through 2021 and early 2022. Operating margins on the segment pushed above 70 percent. Bulls argued that Apple was really a platform company with a hardware business attached, and at 70 percent gross margins the Services mix shift alone could drive multiple expansion.

That thesis was correct for a while. It is now stale.

Services growth peaked at roughly 27 percent year-over-year in fiscal 2022. By fiscal 2024 it had slowed to the mid-teens. Recent quarterly reads have the segment growing in the low-double-digit range, with the most recent quarter coming in at a pace that, if sustained, implies Services growth rolling toward high-single-digits within twelve months.

Management has three explanations. First, currency is a headwind. Second, gaming and App Store comparisons are tough. Third, regulatory changes in the EU and Korea have pressured take rates. Each of those is partially true. Each of those is also a softening argument dressed up as context. If Services were the 20 percent growth business the multiple assumes, it would be absorbing these headwinds without breaking stride. It is not.

The sector pattern here is instructive. Every platform business that has attempted to transition from growth multiples to durability multiples has gone through a valuation air pocket when that transition became visible in the data. Microsoft lived through it in 2016. Oracle did the same in the mid-2010s. Google is still working through it with YouTube and Cloud. The pattern is consistent, and Apple is not immune.

The wrinkle is that Apple's hardware business has been doing more of the work than the Services narrative lets on. Fiscal 2025 revenue of $416 billion was up 6.4 percent year-over-year. Back out Services and the hardware segments grew mid-single-digits. That is respectable, but it is not the profile of a company trading at a 35x trailing multiple.

Trailing twelve-month operating margin sits at 35.4 percent, which is excellent. The bull case says this is sustainable and expanding. The problem is that margin has been essentially flat for the past three fiscal years. Operating income has grown, but through revenue expansion, not leverage.

Free cash flow tells a more complicated story. Apple generated $99 billion in fiscal 2025, down from $109 billion in fiscal 2024. Capex was up 35 percent year-over-year as the company pushed into AI infrastructure. Buybacks are still running at roughly $90 billion annualised, but the coverage ratio of buybacks to FCF has narrowed. At the current clip Apple is effectively funding buybacks out of prior-year cash, not current-year generation. That is not a red flag yet. It is a yellow flag.

The dividend yield of 0.4 percent is a rounding error. The capital return story at Apple has always been buybacks. And the buyback arithmetic only works if the multiple does not compress.

Here is where the story gets uncomfortable for Apple. The most recent analyst coverage has focused on a hardware bottleneck, a supply-side constraint that is preventing the iPhone from scaling in the way the post-launch order book would suggest. Whether this is a component sourcing issue, a manufacturing diversification issue, or something structural related to AI silicon integration, the practical effect is the same. Revenue that should have flowed through in the current quarter is being pushed out.

That creates two problems for the multiple. First, it means current-quarter results will underwhelm even modest expectations. Second, it raises questions about execution at a company that has historically never missed on supply chain. Apple built its reputation on operational excellence. A hardware bottleneck at this scale is unusual, and the market has not fully discounted it.

Combine the Services deceleration with the hardware bottleneck and the picture looks less like a 35x platform company and more like a high-single-digit earnings grower going through a temporary pause. The bulls will say the pause is temporary. The skeptics will say that temporary pauses at premium multiples tend to last longer than anyone expects. The bearish case has been in place for six months. The data hasn't changed the calculus.