I’ve long been more skeptical than most of Apple Inc. (NASDAQ:AAPL) stock. Admittedly, that’s led me to miss out on a major rally in AAPL stock, which has gained 41% this year and is setting a series of all-time highs in that run-up.
With a market cap now almost $844 billion, Apple is easily the world’s most valuable U.S.-listed company. Second-place Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) is some $195 billion behind, enough to buy Toyota Motor Corp (ADR) (NYSE:TM), only the world’s most valuable automaker, and have some money left over.
My skepticism about AAPL stock has been driven by the fact that the company remains dangerously reliant on the iPhone. Apple revenue beyond the iPhone has been almost bizarrely flat the past few years. And with smartphone growth slowing and the product itself — at some point — at risk of being commoditized, that seems to limit Apple’s out-year earnings potential.
Of course, that sounds like the bear case for AAPL stock made by many investors over the past few years. So far, most have been wrong. (It is worth pointing out that Apple stock did pretty much stall out between 2012 highs and early 2016 lows.) But with the iPhone 8 launch reportedly two weeks away, it’s worth asking: After the new iPhone arrives, what’s left to drive Apple stock price? And does the mean that the long run in AAPL stock might finally come to an end?
Codependency: Apple Stock and the iPhone
I’ve pointed this out before, but Apple’s non-iPhone sales the past few fiscal years really haven’t moved:
- 2012: $77.8 billion
- 2013: $79.6 billion
- 2014: $80.6 billion
- 2015: $78.7 billion
- 2016: $78.9 billion
That’s 1.4% growth, total, over four years. There’s obviously been a lot of change in those numbers, including iPod sales that started dropping near the beginning of the decade. Meanwhile, iPad sales peaked in fiscal 2013. But services revenue has strengthened of late, and sales of ‘other products’ like Beats and Apple TV have grown as well.
To be sure, Apple’s non-iPhone products are massively profitable. And some of the optimism on AAPL stock in fiscal 2017 has come from the company’s ability to grow revenue outside of the iPhone. Through the first three quarters of FY17 (which ends in September), non-iPhone sales have increased 6.5%. Most of that improvement has come from the Services segment, which has grown 19%. Mac sales (+9%) have rebounded as well.
The Services business probably has to be the driver going forward. CEO Tim Cook has set a target of $50 billion in that segment — two times FY16 revenue — and Apple may use acquisitions to get there. (That’s one reason the company has been tied to potential targets like Walt Disney Co (NYSE:DIS), Netflix, Inc. (NASDAQ:NFLX) and others.)
But I remain skeptical that that’s enough.
The iPhone still generated over 63% of revenue YTD, and likely a higher proportion of profits. Against an $844 billion market cap, a few billion a year in Service revenue doesn’t change the case all that much (as crazy as that sounds). And there’s a real risk that once the iPhone 8 sales cycle peaks, and if Chinese demand doesn’t rebound, iPhone declines (bear in mind iPhone revenue fell 12% in FY16) could overwhelm whatever strength Apple can muster elsewhere.
Bottomline on AAPL Stock
Overall, I still think Apple needs another major driver to get it toward that trillion-dollar mark. And I’m not sure from where it’s supposed to come. Apple’s self-driving car initiative continues to shrink. It’s missed the boat with Siri, as both Amazon.com, Inc. (NASDAQ:AMZN) and Google have beat Apple to market with smart speakers and appear to have stronger AI capabilities.
Sure, it’s possible that the iPhone will remain strong enough to carry AAPL stock. A 15x forward EPS multiple (which is closer to 13x after backing out the company’s huge cash hoard) hardly requires torrid growth to support the current Apple share price.
But in the near term, it’s not hard to imagine a “sell the news” reaction to the launch next month and fiscal Q4 earnings in October. Once the iPhone 8 is seen, and sold, investor attention will return to the rest of the business. And I still don’t think the news there is quite good enough to keep the run in AAPL stock intact.
As of this writing, Vince Martin has no positions in any of the aforementioned securities.
