Consumers spent major cash on Apple's (AAPL) App Store in 2016 -- a trend the company expects to continue in 2017. The App Store in December logged its highest-grossing month in its history, generating some $3 billion in revenue.
What does all of this mean for Apple stock? It can finally begin to untether itself from the reliance it has on the up-and-down cycle of iPhone sales. And that's a good thing, given that the company has reportedly lowered production of the iPhone 7 by 10%. I'll get to that in a moment. For now, with The Telegraph estimating almost $30 billion spent on apps, Apple's income is becoming more diversified.
On Thursday the Cupertino-based tech giant disclosed its App Store experienced a 40% year-over-year surge in revenue in 2016. Apple says on New Year's day alone, customers spent nearly $240 million on apps and in-app purchases, marking the App Store's largest single-day of sales ever.
"2016 was a record-shattering year for the App Store," said Philip Schiller, Apple's senior vice president of worldwide marketing, in a statement.
Between in-app purchases on Madden football, Jurassic World, Deer Hunter and Rollercoaster Tycoon, my household contributed to about $65 of those New Year's day sales. You're welcome, Apple. According to Apple's website, app developers typically receive 70% of sales revenue, while Apple takes a 30% cut.
The company also enjoyed a 74% surge in billings from subscription services like Netflix (NFLX), popular dating app Tinder and Time Warner's (TWX) HBO Now, reaching to $2.7 billion. Among the App Store's more than 2 million offerings, Apple said Pokemon Go was the most downloaded app. The recently released Super Mario Run, not surprisingly, ranked in the top 10 of most downloaded apps.
The significance of all of this? As Apple's iPhone sales have slowed, suffering its first year-over-year decline last year since its inception in 2007, Apple has increasingly emphasized the cash flowing in from its Services division. The Services business, which includes the App Store, revenues from Apple Pay and Apple Music, rose 24% in the most-recent quarter, posting revenue of $6.3 billion.
Apple has also begun to restructure its business to create a separate Cloud Services segment. The more diversified Apple becomes, the less fearful investors will be about declining iPhone revenue. And to the extent the services business can continue to grow at 20%+ rates, Apple shares -- currently priced at 13 times forward earnings vs. 18 for the S&P 500 Index -- could command a higher multiple. With Apple shares now trading at around $116, a $145 target -- on the strength of its services -- seems more than realistic.