Having delivered a spectacular quarter and fiscal 2017, Apple Inc. (NASDAQ:AAPL) is planning an even bigger Christmas rush for its Apple X and Apple 8 phones, as well as its Apple Watch. This has propelled the AAPL stock price to record levels and pushed Apple’s market cap to almost $900 billion.
But investors need to take their eyes off the product in looking for growth.
Revenue for the fourth quarter of Apple’s fiscal year came in at over $52.6 billion, up over 10% from the previous year. Christmas season revenue is expected to top $85 billion, with $3.75 per share of profit, which would be over $19 billion.
Apple will need to deliver to justify its present market cap. The AAPL stock price is up 51% so far in 2017, and the price to earnings ratio is approaching the market average at 19, which itself is much higher than normal.
Meanwhile, no matter what it does in production and marketing, pressures against Apple are building.
The Tax Man
The biggest threat to growing profits, and thus shareholder equity, is taxes.
Apple insists its tax rate on foreign earnings is 21%, and its effective rate in the U.S. is the statutory 35%. But the so-called Paradise Papers claim Apple has moved most of its profit out of Ireland to other tax havens to build a cash hoard that now totals $252 billion, about the gross domestic product (GDP) of Chile or Pakistan. Apple’s 2017 revenues were greater than the GDP of Vietnam.
Companies as big as countries need an infrastructure to match. Apple’s new “spaceship” headquarters is bigger than many national capitol buildings, but it is not a country. Apple is a company subject to real countries’ laws, and it is facing an international political backlash of unknown size.
The Next Catalyst for AAPL Stock
If Apple is to keep growing, then its service revenue must keep growing, and it must create new services to keep that growth going.
For all of 2017, services were up 34% to a run rate of $34 billion per year. This is the real miracle CEO Tim Cook has created. By investing cash in cloud, Apple has created a business that is twice as big as the iPad and bigger than the iMac. Services could be over 20% of revenues in 2018.