Tech giant Apple Inc. (NASDAQ:AAPL) struggled in 2016 as investors questioned whether or not the Cupertino, California-based tech giant had plateaued. The firm released three consecutive quarters of revenue declines and many worried that Apple was losing its touch. However, patient investors that held on to AAPL stock were handsomely rewarded during the first four months of 2017, which saw the stock tack on 20% and head to all-time highs.
With Apple shares stumbling in the wake of first-quarter earnings, however, the questions about how much higher AAPL has to go have returned.
But it’s not time to cash out. Apple stock continues to be a long-term buy, and the company still has a few things — some exciting, some not — that will help propel shares higher from here.
The New iPhone
The iPhone 8 is the single-most important driver of AAPL stock, and Apple’s shrug-worthy reaction to a mostly disappointing fiscal second-quarter earnings report.
This year’s model will mark the 10th anniversary of the original iPhone, and the buzz has been so palpable that Tim Cook actually blamed it for some of the weakness in Apple’s Q2 performance. The idea is that many customers have been holding out on upgrading their phones to wait for the updated version.
Among the rumored features are a curved, OLED display, stainless steel edges, A11 chip, bezel-less front, vertical dual cameras, a Smart Connector, improved waterproofing, in-display Touch ID, better waterproofing … there’s quite a bit.
Guidance for the third quarter — in a range of $43.5 billion to $45.5 billion — came up short of Wall Street’s mark for $45.6 billion, but it’s hard to tell if Apple is just playing this one extremely close to the vest. This could be another sign that the iPhone 8 will be delayed — Cowen & Company analysts believe it’ll be pushed back by four to six weeks — but that doesn’t negate the hordes of people waiting to upgrade their iPhones.
It just delays the effect.
More Than Phones
While iPhones are the bread and butter of Apple’s business, the company has a few things in the pipeline that could turn into big things in the years ahead.
On the practical side, there’s the Services division (iTunes, Apple Pay and more), which grew revenues by 18% to $7.04 billion. Perhaps most impressive, however, was the merely 2% decline quarter-over-quarter despite a 39% drop in iPhone sales over the same time period.
Services likely will never become as big a contributor to revenues as the iPhone (~60%), but it’s an increasingly important source of recurring revenue streams, and provides a steady baseline.
Perhaps the most exciting of Apple’s possible future plans is the creation of space internet, or the ability to beam internet to the Earth via satellites. This might sound like the kind of project Alphabet Inc (NASDAQ:GOOGL) might gamble on, but Apple has started hiring experts in that field, and it was something the late Steve Jobs thought would be a good idea.
Space internet would be a huge step forward for Apple because it would eliminate some of the firm’s dependence on wireless carriers. Creating its own network would give Apple more control in markets like the U.S. and Europe; and even more importantly, it would eliminate some of the firm’s barriers to growth in emerging economies like India.
Not only that, but SpaceX has projected that such a network could generate some $30 billion in revenue each year.
Passive Income
The long-term potential for Apple is huge especially when you take into account the firm’s massive cash reserve and the potential influx of money the company will receive under potential tax reforms and repatriation holidays from the Trump administration.
While you may have to wait a while before the firm comes out with another culture-shifting revelation like the iPhone, that wait is sweetened by a very reliable dividend payment and constant buybacks to prop up the stock.
Perhaps the least-covered aspect of Apple’s Q2 report was the 10% hike in the dividend on AAPL stock to 63 cents per share, which at $13.22 billion annually has surpassed Exxon Mobil Corporation (NYSE:XOM) as the world’s largest dividend.
While that’s still good for just a modest 1.7% yield at current prices, Apple has grown its payout 66% since establishing a regular dividend in 2012, and those who bought in at the time are now enjoying a nearly 3% yield on cost.
Dividend growth matters, and given Apple’s outstanding free cash flow, that payout should continue to climb steadily and substantially over time.
Bottom Line on AAPL Stock
Apple has been making a comeback over the past few months, and Wednesday’s action is just a speed bump, not a wall.
Investors could expect to see Apple fade a bit as second-quarter earnings temper investors’ euphoria, but more concrete details about the iPhone 8 launch will put AAPL shares back on track.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
