Apple's Apple (AAPL) services business is doing what it does best: quietly printing money while everyone obsesses over iPhone sales. As the company heads into its fiscal third-quarter earnings, analysts are zeroing in on the services segment to carry the torch.
On Monday, Bank of America reiterated its Buy rating on Apple, pointing to continued strength in services and long-term upside from artificial intelligence and new product categories. The firm sees services revenue growing about 14% year over year in the quarter, which would be a nice cushion against any weakness in hardware.
The App Store: Not Dead Yet
App Store revenue rose 3.7% year over year to about $3.2 billion in the first 33 days of the quarter. That's not exactly explosive, but the story is in the details: downloads increased just 0.7%, while revenue per download climbed about 3% to $1.01. In other words, Apple is making more money from each user, even if the user base isn't growing as fast.
Gaming remains under pressure, the firm noted, while productivity apps are gaining share. That shift in consumer behavior is worth watching — it suggests people are spending more on tools and less on entertainment, which could have implications for the broader app economy.
AI Competition Heats Up
Meanwhile, the AI wars are playing out in real time on the App Store. Alphabet's Google (GOOGL) has seen its share of daily active users in its search app decline to roughly 73% from 88% in early 2025, as AI-focused platforms gain traction. ChatGPT is the clear leader among AI apps, generating more than $240 million in monthly App Store revenue in April — well ahead of any competitor.
That's a double-edged sword for Apple. On one hand, the App Store takes a cut of all that AI app revenue. On the other, if AI assistants start replacing traditional search, Google's willingness to pay Apple billions for default search placement could eventually come into question. For now, though, the cash keeps flowing.
The Numbers Game
Bank of America forecasts Apple will earn $8.61 per share in fiscal 2026, rising to $9.96 in 2027 and $10.84 in 2028. The firm's $330 price target is based on a 32 times multiple of estimated 2027 earnings of $10.29 per share, implying potential upside of about 18% from current levels.
That valuation might seem rich, but the thesis rests on services expansion and AI-driven hardware upgrades — the idea that Apple Intelligence will eventually convince people to upgrade their iPhones, iPads, and Macs. If that plays out, the services flywheel keeps spinning faster.
Risks to Watch
Analysts caution that risks include a weaker iPhone upgrade cycle, regulatory pressures, and potential slowing in services growth. But they also note that Apple's investment case is supported by strong capital returns, margin expansion from in-house chip development, and the growing contribution from services.
At the end of the day, Apple's ecosystem strength and AI integration remain the key drivers. The company's shares were down 1.20% at $276.77 at the time of publication on Monday, according to market data. That's a small dip in a stock that's up significantly over the past year — and one that analysts still see plenty of room to run.
