Apple’s services could be worth more than Facebook by the end of 2021

That's if Wedbush analyst Dan Ives is correct!

What you need to know

• Wedbush analyst Dan Ives believes Apple's services could skyrocket in the next two years.
• He believes it could be worth between $500 billion and $650 billion by the end of 2021.
• That would give it the same value as Facebook right now.

Wedbush analyst Dan Ives has predicted that Apple's services business could be worth as much as Facebook by the end of 2021.

According to a report from The Motley Fool, he believes that the value of Apple's services sector could top $650 million in the next two years:

Wedbush analyst Dan Ives values the services business highly. He thinks it'll be worth $500 billion to $650 billion by the end of 2021. To put that in perspective, that's about the same value as Facebook (NASDAQ:FB) right now.

Apple's services business should see continued growth over the next couple of years, especially if the widely expected 5G iPhone supercycle comes to fruition. The more stable recurring-revenue stream from services should help balance the more cyclical device sales that represent the core of Apple's business.

Ives believes that Apple's strong services growth will continue over the next two years, and estimates 2021 revenue to increase to $60 billion by 2021, given that revenue rose by 16% to $60 billion in 2021, that's actually not a massive a jump. Ives believes this in part will be driven by Apple TV+, where later this year, many subscribers will come to the end of their free year's subscription and will have to decide whether to fork out to continue watching. Apple Arcade is also said to be one of the driving factors, given its higher average revenue per user than the App Store. Finally, Apple Card is also expected to continue adding retail partners and increasing everyday use.

Alongside revenue, the favorable gross margin of Apple's services sector is another reason for the monster predicted valuation, with gross margins in 2019 rising to 63.7%. Even though Apple has a massive $6 billion content budget for Apple TV+, by investing in its content upfront, Apple has maximized the potential for longer-term gross margins (provided it sells enough subscriptions). Which leads us to the "as big as Facebook" valuation:

A $60 billion business with gross margin exceeding 60% and growing its top line at a mid-teens annual rate is certainly a very valuable asset.

For perspective, Facebook generated $66.5 billion in revenue with a gross margin above 80% over the last 12 months, and the market currently values it around $630 billion. It's also growing revenue faster than Apple's services segment. Granted, Facebook faces more regulatory scrutiny than Apple (not that Apple is free of scrutiny itself), and its research and development expenses are likely higher than what Apple is spending on services. So perhaps it evens out when it comes to the bottom line -- or perhaps not.

Facebook and Apple's services are very different animals, the comparison is only really to show just how much potential Apple's services platform could have over the next couple of years. The problem with this kind of thinking, however, is that Apple's services sector is not a standalone venture, and is in fact inextricably linked to the success of Apple's hardware. So whilst Apple's services may be growing incredibly quickly (it celebrated its best-ever year in 2019), that's only really been made possible because Apple has done so well from a hardware standpoint that there's an enormous customer base out there that Apple can tap into. So whilst Apple's services might well be worth a lot of money to Apple as a whole, without the rest of Apple, it wouldn't be worth anything.