The bull/bear argument for and against Apple Inc. (NASDAQ:AAPL) stock is pretty simple. AAPL stock bulls argue that the stock is simply too cheap. Apple is a great company, with roughly $30 per share in net cash; yet Apple stock trades at basically 10x next year’s earnings plus cash. Investors are acting as if Apple earnings will decline going forward — which makes no sense for what remains the world’s most popular consumer goods company (and the world’s most valuable stock).
Bears reply, in essence, that AAPL stock should get a multiple befitting a declining company. As popular as the iPhone is, competition is intense, and only getting tougher.
And as smartphones become more commoditized, the edge that the iPhone has over, say, a Samsung (OTCMKTS:SSNLF) Galaxy — let alone Chinese competitors — will narrow. That should pressure pricing, margins and Apple shares.
With Apple stock at an all-time high, the bulls are winning the argument at the moment. But from a long-term standpoint, the bears have a point. AAPL may not be the next Gateway Computer, but commoditization is a risk. Apple needs another growth driver to keep its stock rising over the long-term. The company hasn’t quite found the right product yet; however, and it’s not sure what it will be.
Apple Stock Has Been Valued Based on the iPhone
It’s not hard to come to the conclusion that AAPL stock is directly correlated to iPhone sales. It was iPhone-driven optimism that drove Apple shares from under $100 (pre-split; equivalent to ~$12.50 now) in 2009 to $100 by 2012. Since then, Apple stock has declined sharply twice.
The first time was in 2013. In fiscal 2013 (AAPL fiscal years end in September), the iPhone growth rate slowed sharply: iPhone unit sales growth dropped from 73% in FY12 to 20.2% in FY13, and those fears knocked down Apple shares. The second decline came in between 2015 and 2016, during a year where iPhone revenue dropped 12% year-over-year on an 8% decrease in unit sales.
Looking backwards, it certainly seems like AAPL stock is driven by sentiment toward the iPhone. There’s one key reason for that: the rest of Apple has been consistently, and almost incredibly stagnant. Here’s Apple revenue ex-iPhone sales over the last five fiscal years (per AAPL filings):
- 2012: $77.8 billion
- 2013: $79.6 billion
- 2014: $80.8 billion
- 2015: $78.7 billion
- 2016: $78.9 billion
Obviously, those sales have come from different sources. Mac revenues have been relatively stable, in the $21 to $25 billion range. iPod sales have faded, but have been offset by the modest growth in Apple Watch sales, leaving “other products” revenues rather flat. iPad sales have fallen from $32 billion in FY13 to barely $20 billion last year; growth in services (iTunes, Apple Music, Apple Pay, etc.) has offset that decline.
But the point is that, other than the iPhone, Apple stock really isn’t a growth stock. In fact, it looks a lot like the bears view Apple as a whole. And that raises the question of if AAPL can become a true growth stock, and drive upside from its current all-time highs.
But AAPL Stock Needs Another Hit
At this point, I wouldn’t bet against AAPL stock, but I’m skeptical the company can really drive growth beyond the iPhone. A simple breakdown of the ~$79 billion in trailing twelve-month non-iPhone revenue shows there really isn’t much in the pipeline. $23 billion (30%) comes from Mac notebooks and desktops. That’s a great, high-margin product, but overall desktop/notebook sales are declining and Mac revenue declined 10% in FY16 (it did rise 7% in Q1 FY17); $19 billion (24%) comes from the iPad.
Those sales are declining, falling 23% in FY15, 11% in FY16 and a concerning 22% in Q1. Services revenue is double what it was after FY12, and drives about one-third of non-iPhone revenue. But those businesses still comprise just ~12% of total sales.
Other products make up the rest of non-iPhone revenue, with that segment including Beats headphones, Apple TV, the iPod (yes, Apple still sells them) and, of course, Apple Watch. Apple Watch has been cited as a potential driver for AAPL stock, but Apple still doesn’t break out revenue. CEO Tim Cook did say on the AAPL Q1 earnings call that Watch sales hit an all-time high in the December quarter.
But “other products” sales over the last four quarters still are under $11 billion. That’s about 5% of total revenue. And Apple Watch is only a portion of those sales.
iPhone Reliance Could Hurt Apple Stock
And that’s the key problem for Apple stock at the highs, in my opinion. The iPhone is so dominant that everything else pares in comparison. The Apple Watch would be considered a success for nearly every company on Earth. But its revenue over the last year is probably, at best, in the range of $6 billion. Over the same period, the iPhone generated $139 billion in revenue.
The point is that AAPL stock remains indistinguishable from the iPhone. Apple Watch, Apple Pay, Beats and other ancillary products are good products, and drive excellent sales. But the iPhone is such a phenomenon that they almost don’t matter — and it’s almost impossible to create a product that can drive anywhere near that level of success. And I believe that creates a long-term risk for AAPL stock, even if that risk isn’t playing out at the moment.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.