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Why Apple Is Still Trading at Relatively Low Valuation Multiples

- By Sangara Narayanan

Apple (AAPL) reported solid first-quarter 2017 earnings, posting the best-ever iPhone sales in its history.

Apple reported earnings per share of $3.36 on the back of $78.4 billion in revenues while the market was expecting $3.21 earnings per share and $77.25 billion in revenues. The sales and earnings beat was made possible by robust iPhone sales during the quarter, thanks to the strong demand created by the launch of iPhone 7 and 7 Plus.


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The problem Apple faces is that it is still far too dependent on a single product, which accounted for 69.40% of Apple's revenues during the quarter.

Neither of Apple's new launches - Apple Watch series 2 and AirPods - turned out of be a major hit despite Apple Watch doing reasonably well over the holiday quarter.

But Apple is still searching for a new product that can support its growth story. It's been too long since we saw a disruptive product come out of Apple's stables, which has left the company reworking existing product lines.

Device sales around the world are expected to stay flat over the next several years. If smartphone sales growth stagnates worldwide, Apple will be looking for product refreshes to keep its sales numbers moving. That might allow the company to post solid numbers for a few quarters before it starts to taper off.

Looking at it another way, if iPhone sales only grew by 5% right after the launch of a new model, how many more quarters can that growth last? And what will happen two years from now, after the next model is launched?

The fact is, Apple is in a position where it could be a hit or a miss in any given quarter, and the company's valuation will keep moving up and down depending on how the market reacts to each product refresh. That's not a great place to be if you are a company that is nearing $100 billion in quarterly sales. You need to find your offsets, either on the product side or from the services side.

Apple's services segment is the one thing that can help the company over the long term, but that segment is still far away from taking the revenue load off iPhone's shoulders.

Apple is still a great company thanks to the loyal userbase and the high level of profitability that its premium-positioned devices bring in. But without new products Apple is looking more and more like a utility company that will keep inching ahead instead of marching ahead.

The market clearly understands that Apple is in a tricky position, and that growth is going to be touch and go until Apple resolves the fundamental issue of balancing its revenue streams outside of iPhone. That's why, despite reporting history-beating numbers, Apple is trading at 15.3 times earnings and 3.2 times sales - tepid multiples for a technology company.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.


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