Apple Inc. (NASDAQ:AAPL) has garnered headlines on many fronts. The Cupertino, California-based tech giant recently faced negative press amid slowing devices and a lackluster iPhone release. However, it is the disappointing iPhone X sales that have more important implications for investors.
Apple joined the family of Dow 30 stocks in 2015. Unfortunately for growth investors, AAPL stock now behaves like a member of the Dow and less like a technology leader.
Apple Can No Longer Rely on Innovation
In shopping for a new tablet recently, I witnessed something unexpected. Since I treat tablets more like a toy, I made cost the primary factor in making my decision. Interestingly, the iPad won out on cost over its Samsung Electronics Co Ltd (OTCMKTS:SSNLF) counterpart.
In all the years I’ve followed tech, Apple innovation always came at a premium price. I like my new iPad, and I love getting more for my money. Still, the fact that Apple now competes on price serves as a tacit admission that Apple can no longer drive profits on innovation alone.
That admission speaks to Apple’s unsolvable problem, replacing Steve Jobs. Yes, Tim Cook has met all reasonable expectations as a successor. Under Cook, the company produces desired products and remains competitive.
However, Cook, like all other known successors, lacks the innovative genius showed by Jobs that led to the development of the iPod, and later, the iPhone and the iPad. These devices were quantum leaps forward in tech advancement.
Today, as our own Josh Enomoto points out, the iPhone X is not materially better or more innovative than its Android-run counterpart. Investors will likely not pay premiums for “me too” products. And this same “me too” mentality has permeated its other products.
The company will soon release the Apple HomePod. The HomePod serves as Apple’s alternative to the Echo from Amazon.com, Inc. (NASDAQ:AMZN) or Google Home, produced by its parent company Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). The speculation indicates Apple will have trouble catching up to its competitors, let alone surpassing them.
AAPL Stock Valuation Reflects the Lack of Tech Leadership
This comparative lack of innovation has shown up on its financials. Without a new iPhone release, profit growth stagnated after 2015. Fiscal 2017 earnings of $9.21 per share came in one penny lower than its 2015 earnings. iPhone sales will serve as a catalyst to increase this number.
So far, consensus earnings for 2018 stand at $11.18 per share. However, they predict only low single-digit growth for the next two years. These numbers lag the increase that came about after the previous major iPhone release.
In 2015, profits increased by about 44% during its last major iPhone release. The projected earnings increase driven by the latest iPhone release stands at 21%. Additionally, that number will likely be revised when AAPL reports earnings on Feb. 1. This report should give investors hard data on how much the iPhone X will increase profits.
Valuations also remain subdued. Apple trades at only 19 times earnings. This multiple remains well below other tech giants such as Amazon at over 330 times earnings, Netflix, Inc. (NASDAQ:NFLX) at a multiple over 220, and even Alphabet at a 38 price-to-earnings (PE) ratio. AAPL stock is even a modest valuation drag on the Dow 30, whose current average PE is 23.
Final Thoughts on AAPL Stock
Given valuation and earnings expectations, AAPL stock should be thought of as the Dow 30 stock it is. When Steve Jobs returned to Apple in 1997, he took a nearly bankrupt tech company and made it the leader of the tech world by the time of his passing in 2011.
Without Steve Jobs, Apple has held its own but no longer serves as the innovation leader. This lack of innovation has turned Apple stock more like its Dow 30 counterparts. While placement in the Dow remains enviable, it makes AAPL more like DowDuPont Inc (NYSE:DWDP) or JPMorgan Chase & Co. (NYSE:JPM), and less like Amazon or Netflix.
When Steve Jobs returned to Apple, he said, “The products suck! There’s no sex to them anymore!” Unfortunately for its investors, it is now AAPL stock that lacks the sex.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.