Apple Inc. (NASDAQ:AAPL) is about a month away from launching the iPhone 7, so Apple stock has come into the limelight of late. Wall Street is naturally weighing in, albeit with widely varying views of what the new iPhone portends for the future of Apple and AAPL shares.
First was UBS analyst Steven Milunovich, who told Barron’s that iPhone growth is ”inevitable” at some point in the future. Mr. Milunovich reasons that despite an extended iPhone refresh cycle, Apple’s huge installed base means that at some point all these people will get tired of their jaded iPhone handsets and start rushing to their nearest Apple store to buy themselves a shiny new thing.
On the opposite end of the spectrum is Stuart Frankel’s Steve Grasso. He recently spoke on CNBC, where he issued a rather harsh indictment of AAPL, saying the company is doomed to ”underperform perpetually.”
Mr. Grasso said Apple stock is no longer a risk asset (assets with high volatility such as growth stocks) and that AAPL has only benefited from everyone getting pushed in the market. Grasso added that he would sell Apple stock on any short-term strength, such as the recent 13% rally after the company delivered better-than-feared Q3 earnings.
In a nutshell, Grasso said Apple’s glory days as a growth company are over.
The commentary touched a raw nerve because it came at time when Apple stock had been underperforming, with growth increasingly difficult to come by. Despite recent gains in AAPL stock, it’s up a mere 4% year-to-date … and down 6% over the past 52 weeks.
Perhaps investors should not dismiss Mr. Grasso as just another soapboaxer who is out to spoil the party. After all, there’s a solid chance that the upcoming iPhone might not perform according to heightened expectations.
New Growth Runways for Apple Stock
Unlike the case a few years ago, Apple is no longer the 800-pound gorilla in the room. Smartphone momentum has been gradually shifting from Cupertino to Seoul. Samsung (OTCMKTS:SSNLF) has grown into a formidable Apple competitor, with the Samsung S7/S7 Edge managing to edge out the iPhone 6s/6s with 16% of U.S. smartphone sales vs. 14.6%. Although Apple loyalty remains quite high, as many as 5% of current iPhone users have indicated their willingness to defect to the Samsung camp when the next upgrade cycle comes calling.
But Apple is far from a basket case.
The short-term outlook for Apple stock is actually good. 2016 is shaping up to be an annus horribilis for Apple investors as iPhone sales are expected to tank in double-digits to below 200 million units, a brutal decline for a device that has managed to post uninterrupted growth for close to a decade.
But that kind of drop will inevitably set up easier comps for another year, even two. Indeed, Mr. Milunovich’s estimates of modest single-digit growth in iPhone sales in FY 2017 and as much as 20% growth in FY 2018 might actually be in the ballpark — due to abysmal sales in the current year.
And some of Apple’s revenue segments remain in the pink of health. Apple’s Service segment that consists of Apple Music subscriptions, paid apps from App Store, iTunes Music and iCloud storage, among others, has been doing quite well. The segment grew 19% year-over-year last quarter to $5.98 billion, with App Store revenue growing 37%. The segment now contributes a fifth of Apple gross profits, and CEO Tim Cook says the segment could be “the size of a Fortune 100 company by next year.”
Moreover, Apple still has some promising projects in the pipeline, including Apple TV. A streaming Apple TV service has mainly been delayed by Apple using hardball tactics during negotiations with cable content providers as it tries to get more favorable terms. But the company says it’s willing to wait and will eventually get its way.
Further, Apple still retains a huge cash hoard that it can use to continue making strategic acquisitions. Indeed, CEO Tim Cook recently told Wall Street that Apple plans to up its M&A game, saying, “In times when equity values are falling, there’s great opportunity to (buy companies).”
Is Apple Stock a Growth Play, Or a Value Play?
This is, of course, the million-dollar question. Growth stocks tend to receive significantly higher valuation multiples than value stocks. Although Apple is still classified as a growth stock by index providers such as FTSE Russell and S&P Dow Jones, the fact that Warren Buffet’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) and value-oriented mutual fund investors have been piling in suggests that Apple stock is increasingly showing some value characteristics.
It might, however, be a year or more before the indices are rebalanced and AAPL is finally designated a value stock.
Nevertheless, it’s too early to say that this will happen with any degree of certainty. After all, Apple has only recorded declining sales for two quarters, whereas its growth record stretches back much further.
Apple stock appears like a good hold over the next two years.
As of this writing, Brian Wu did not hold any positions in any of the aforementioned securities.
