There was a time when one could just look at the results for Apple Inc. (NASDAQ:AAPL), shrug, watch the stock fly, and move on. That’s what I did, to my detriment, because I didn’t realize the extent to which the iPhone sales became the vast majority of AAPL revenue. I lost sight of the complete story. Now, investors must really parse AAPL earnings and not take anything for granted.
First, it should be noted that AAPL sold its one-billionth iPhone. That is an extraordinary achievement and can’t be glossed over.
Selling a million of anything is a challenge, but a billion is mind-bending. That being said, iPhone sales did decline both sequentially from 51.2 million units in Q2 to 40.4 million units in Q3, and from 47.5 million units in Q3 of last year.
Obviously, that’s because AAPL has not issued a new version of the iPhone for some time. As you can see from the chart below, that’s a highly unusual decline for iPhone sales. It isn’t that the public doesn’t love iPhones; it’s just that they love new versions of it more.
From an AAPL revenue standpoint, as a percentage of revenue, iPhone sales went from 63% last year to 56.7% this year. One the one hand, that’s great news because AAPL is relying less on the iPhone for revenue. On the other hand, that’s because iPhone sales declined!
The problem is that sales for iPads and Desktops and laptops also fell year-over-year, and combined, it resulted in the second consecutive quarter of earnings declines after 13 years of growth. There was some good news here in that the iPad Pro stoked iPad sales and the Pro has higher margins.
There are other troubles. Although revenue fell across the board sequentially in all geographic segments, and YOY in all segments except Japan (where it was up 23%), China was a disaster. Revenue fell 29% sequentially and 33% YOY.
There are three remaining points here for investors.
AAPL Stock: Points to Consider
First, the Services segment is starting to grow. That’s stuff like app store purchases, music subscriptions and iCloud storage. Revenue on this segment is now just about $6 billion, a not-insignificant 15% of total revenue. The more AAPL can move in this direction, perhaps the less dependent it will be on iPhone sales.
Second, AAPL has always been somewhat of a cyclical business based on its new releases. September should see new iPhone releases.
Third, it has become painfully clear at this point that Tim Cook is no Steve Jobs. It’s the difference between having a manager and having a visionary. AAPL is no longer a visionary company, and that’s why we’re examining the importance of iPhone sales and not some amazing new direction for the company.
What might be a visionary move? AAPL has $230 billion in cash. It needs to open a movie/TV studio, with a visionary content creation structure, which it could do with $50 billion and have enough to make original content for years. Then it could leverage Apple TV, create its own theatrical distribution arm and give the studios a run for the money.
Or it needs to make a whole lot of acquisitions that are accretive to net income.
Until then, it’s probably fairly valued at this point.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
