The tech sector is shrugging off the weakness of last year with many stocks having breakout years. And Apple (NASDAQ:AAPL) stock is among the biggest winners.
AAPL stock is up over 80% for the year and 7% in the month of December alone. AAPL has added $530 billion in market value in 2019. For some context, that growth in market value represents more than the market capitalizations of all but five companies in the S&P 500 index.
After the tech wreck of 2018, the new year kicked off with a forecast for softer iPhone sales. Demand in China was expected to be weak. The iPhone 11 series would not have 5G capability. It seemed that Apple’s iconic hardware would not be enough to carry the day.
But then something happened. The iPhone 11 had greater sales than expected. And the company saw continuing growth in its Services segment. A look back to the beginning of this decade puts that growth into context.
In 2010, the Service segment contributed $5.2 billion for the entire year. In the third quarter of 2019, that same segment generated $12.5 billion in revenue. Services now make up 18% of total sales.
Apple Is in the Middle of a Perfect Storm
Normally the words “perfect storm” describe an unfortunate confluence of circumstances. However, in the case of Apple, all this positive news leads Mike Olson of Piper Jaffray to comment that Apple is in the middle of a positive perfect storm heading into 2020.
Part of that perfect storm is the company’s Services segment. And one of the new products driving the growth in Apple Services is the company’s new streaming service, Apple TV+. Unfortunately, it’s unclear if the service is a good fit for AAPL and its brand.
Apple TV+ Should Get Off to a Healthy Start
AAPL has a major advantage in its ecosystem. In numerical terms, there are approximately two billion Apple devices that are being used around the world. If just 10% of those users sign up for Apple TV+, it would give Apple approximately 200 million subscribers. To put that number in context, Netflix (NASDAQ:NFLX) has approximately 139 million subscribers.
Unfortunately, like many of the streaming providers right now, an initially robust “subscriber base” can be somewhat fuzzy math. That’s because Apple is giving away Apple TV+ to any consumer who buys a device or trades up for a new model.
On the one hand, that makes 10% seem attainable. On the other hand, it raises a question. Can Apple effectively monetize those consumers when their trial period ends?
The answer will depend to a large extent on how much Apple is able to, and wants to become a content provider.
Apple TV+ Is Off Brand
One of the distinguishing features of Apple products is their distinctive design. In fact, Apple is commonly called a “cult” because consumers allegedly choose design over performance. But Apple TV+ is distinct in that it’s currently not distinguishable.
That doesn’t mean Apple isn’t trying. A unique feature of Apple TV+ is that it contains no licensed content. And, Apple TV+ started out of the gate with four original series (Netflix only had one). However, all the original content comes at a cost. And there is a legitimate question about whether Apple can generate enough compelling content to stay relevant.
Case in point, Apple is expected to spend about $2 billion in the next two years to develop content. By contrast, Netflix is expected to spend about $16 billion in original content in 2020 alone. To be fair, one of the problems that Netflix has faced is the cost of creating original content. But that is going to be one way for companies like Apple to survive in the streaming wars.
Unlike Disney (NYSE:DIS), Apple’s ecosystem is in its hardware. Disney and other streaming services have a bank of content to which consumers have already made a connection.
Apple Stock Will Be Just Fine
There’s a lot to like about Apple, even if Apple TV+ is not currently a reason to be bullish. Ultimately Apple has a proven track record of knowing their customer base. And 2020 should be another great year for iPhone sales. If holiday sales are any indication, it may be a strong year for AirPods as well.
Apple TV+ will be something to watch, mostly during earnings season. A $2 billion investment is not that significant for a company that has a market cap of over $1.3 trillion. But Apple is one of those stocks that investors don’t need a lot of reason to dislike.
If the company begins to project lower-than-expected revenue for Apple TV+, it could be a drag on AAPL stock. Investors will begin to question if Apple should stay in the streaming game. And if so, what will it cost for them to become relevant?
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
