There’s a lot to like about Apple Inc. (NASDAQ:AAPL) at the moment. Since the beginning of 2017, AAPL stock has gained a whopping 25%, adding a cool $150 billion in value in less than three months.
Along the way, it has repeatedly set all-time highs.
Investors are looking to the launch of the next iPhone, likely in September, as the beginning of a new growth cycle for Apple. Corporate tax reform — most notably a tax holiday — could allow Apple to repatriate cash held overseas. And the Galaxy Note 7 troubles at rival Samsung Electronics Co Ltd (OTCMKTS:SSNLF) have strengthened Apple’s competitive position.
However, investors have (whether they know it or not) reasons for relative concern when it comes to shares, particularly from a long-term perspective. Even AAPL stock bulls should understand — and be on the lookout for — these four risks to their positions:
#1: iPhone or Bust
I’d argue that the iPhone is the most successful consumer product of all-time. Only the Model T from the Ford Motor Company (NYSE:F) is in the discussion. It’s the iPhone that has taken Apple from the brink of bankruptcy 20 years ago to the world’s most valuable company.
But the iPhone’s unparalleled success also makes the rest of Apple’s portfolio pale by comparison. And when Apple stock has struggled, it often has been because of worries about whether the rest of the business can support any growth. The iPad was a huge hit early on — but sales are declining. Apple Watch would have been a major success for pretty much any other company. But it barely moves the needle when it comes to sales and earnings.
AAPL has struggled to find a consistent growth driver beyond the iPhone. Non-iPhone revenues have been almost bizarrely stagnant for the last five fiscal years:
- 2012: $77.8 billion
- 2013: $79.6 billion
- 2014: $80.6 billion
- 2015: $78.7 billion
- 2016: $78.9 billion
The Mac laptop and desktop business has been relatively consistent. But the iPod has faded away, due largely to iPhone innovations. iPad sales are in steady decline. Services like iTunes and Apple Pay have picked up some of the slack, but not enough to grow non-iPhone sales. That leaves Apple (and AAPL stock) extremely dependent on the iPhone.
In the long run, that could become an issue.
The iPhone “Moat”
Apple investors kept a close eye on Samsung’s launch of the Galaxy S8 this week. The Note 7 problems and the recent arrest of its vice chairman have no doubt hurt Samsung’s competitiveness. As one analyst pointed out on Wednesday, any errors with the Galaxy S8 launch could leave the Korean conglomerate permanently behind Apple.
The long-term concern is that Samsung won’t be the only competitor. Low-cost Chinese competitors, such as Huawei Technologies, have their eye on the global smartphone industry. And as cameras and processors improve and become cheaper, over time, Apple’s edge seems likely to narrow.
ETFs and Apple Stock
The impact of exchange-traded funds on Apple stock should be a near-term concern for shareholders.
AAPL stock is so valuable that it literally moves markets … but those markets also move the stock.
After all, AAPL is a significant holding in any major index fund, whether the S&P 500 or Nasdaq-100. Large tech-specific funds have almost comically overweight positions in Apple, like the iShares U.S. Technology ETF (NYSEARCA:IYW), which weights Apple at more than 16%, and the Technology Select Sector SPDR Fund (NYSEARCA:XLK), which weights AAPL at roughly 14%.
And with this year’s gains appearing to have been helped along by ETF buying, broader market optimism no doubt has helped push Apple higher.
The converse will be true as well, however. If broad markets take a tumble, Apple stock almost certainly will fall as well — if only because index funds will be selling.
A Lack of Success in Services
Part of the problem with Apple growing beyond the iPhone is that its much-discussed Services business truthfully has never performed all that well. The one major hit was iTunes, which became a gatekeeper of music and video content worldwide.
That business is admittedly on the upswing, but it’s also under pressure, however, as streaming services like Netflix, Inc. (NASDAQ:NFLX) and Pandora Media Inc (NYSE:P) have changed the content landscape. Apple Music and Apple TV are both well behind those competitors. Apple Pay has a core devoted following, but little impact relative to the $750 billion valuation for Apple stock.
Again, there’s a question of what comes after the iPhone – and Services hasn’t been the answer. Apple supposedly has automotive ambitions, but so does everyone from Alphabet Inc (NASDAQ:GOOGL) to privately held Uber to Nvidia Corporation (NASDAQ:NVDA). And there’s little public evidence to suggest Apple has an advantage in that space.
There actually have been more than a few misses for Apple in Services — and there’s not much on the horizon to suggest Apple can diversify away (enough) from products.
Between concerns around the iPhone, and the lack of growth elsewhere, that inability could catch up to Apple stock – eventually.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.