Apple Inc. Could Do So Much Better (AAPL)

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It doesn’t have to be this way for Apple (AAPL). Apple’s growth has clearly stalled, making the risk/reward ratio of Apple stock negative and rendering the shares unattractive. And as long as current Apple CEO Tim Cook is at the helm, things aren’t going to change. But a new leadership team could be just the thing to rejuvenate the company.

apple stock aapl stockApple’s first quarter results, which were announced on Jan. 26, did nothing to quell the pessimism towards the company and Apple stock.

“Don’t [buy Apple stock] because you expect it to become a growth company again. It’s not going to become a growth company,” CNBC quoted Aswath Damodaran, a finance professor at the Stern School of Business at New York University as saying in the wake of the results. Instead, investors should view Apple as “a dividend-paying, solid cash cow.”

Except that Apple’s dividend yield is an unimpressive 2.14%, and there are much less risky stocks around that have much higher yields.

The few remaining Apple enthusiasts are hanging their hats on the idea that the iPhone 7, due out next September, will be a smash hit, according to FBR Capital analyst Daniel Ives. According to The Inquirer, rumors suggest that the newest version of the device will add an OLED screen, and a dual rear camera, along with “a tougher frame.” But the changes don’t sound revolutionary, and buying Apple stock based on the idea that they will spark a significant increase in the device’s sales is a gamble at best.

More importantly, as I pointed out before the results were announced, it’s clear that, under Tim Cook’s leadership, Apple has become a one-trick pony whose trick is weakening. iPhone sales accounted for 68% of the company’s revenue last quarter, while sales of the device were “basically flat” versus the same period a year earlier, according to the BBC. Moreover, Apple’s guidance indicates that year-over-year iPhone sales will fall during the current quarter.

The results validated another main point made in my previous post: Apple’s products other than the iPhone are selling at lackluster rates. Case in point: iPad sales tumbled 21% year-over-year, while Mac sales dropped 3%.

Lackluster Results Outside of iPhones

Sales of Apple’s Other Products category, which includes Apple Watch and Apple TV, jumped 62% to $4.4 billion versus $2.7 billion in the quarter ended December 2014. (Apple does not disclose the revenue generated by individual products in this category). But since Apple Watch was released in April 2015, there were no sales of the product in the quarter that ended in December 2014. So even with the addition of the Apple Watch, revenue in the category increased by only $1.65 billion.

For a company that earned $76 billion in the quarter, that doesn’t amount to much — especially considering the Apple Watch was sold in 48 countries. Put another way, Apple Watch — and the overall growth of the Other Products category — aren’t moving the needle for the company.

Similarly, excluding a one-time payment, the revenue generated by the company’s Services category rose by only 15% year-over-year to $5.5 billion. For a category that includes Apple Music and the much-hyped Apple Pay, 15% growth is an utter disappointment.

Contrast the performance of Apple’s growth initiatives with the revenue generated by Amazon’s (AMZN) cloud business, which soared 69% year-over-year in Q4 to $2.4 billion without adding a significant new business. Even Alphabet’s (GOOG, GOOGL) YouTube was growing global watch time as much as 60% at one point last year, without the addition of a huge new product.

Apple’s investors and the company’s board should be asking themselves why none of the company’s products can generate that type of stupendous growth.

Bottom Line on Apple Stock

British newspaper The Guardian may have found one answer. “Apple is no longer seen as the best place for engineers to work,” the newspaper reported on Jan. 28, adding that this trend has been going on for years but has worsened recently due to a tech boom. Seeing Apple as “secretive” and “controlling,” the best young engineers are choosing Facebook (FB), Alphabet, Uber and Airbnb over the software behemoth, the newspaper quoted recruiters as saying.

Clearly it’s time for a new Apple CEO who can change the company’s culture; attract the best young talent and create new, attractive, fast-growing products once again. Then Apple will go back to being a growth company, enabling Apple stock to rally. Until then, though, investors should sell their Apple stock and look for value stocks with more stable businesses and higher dividend yields.

As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.

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Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/apple-stock-can-do-better/.

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