I’ve been too skeptical toward Apple Inc. (NASDAQ:AAPL) stock in the past — and that has held true so far in 2018. AAPL stock has bounced nicely of late, and an all-time high just above $180 looks potentially in sight.
But, to be honest, I’m not ready to change my tune on Apple stock. I thought the company’s fiscal first-quarter earnings report looked potentially dangerous and, from a short-term standpoint, that turned out to be the case.
Of course, a broad market pullback was the major driver in pushing AAPL stock down; it already trades above where it did before the report.
From here, though, that report seems to support my long-term caution on AAPL. iPhone sales were better than expected and fiscal Q2 guidance looks strong as well. The rest of the business is performing nicely.
Still, the long-term issues remain. Apple continues to be reliant on the iPhone for profits. It’s good news — for now — that it’s able to move units at $999. That can’t last forever, though. Apple’s Q1 earnings may show that “Peak iPhone,” to coin a term, isn’t as close as bears fear. But that peak is still coming — at some point.
The news actually was pretty good in terms of the iPhone as far as Q1 went. Unit sales were below analyst estimates, and down 1% year-over-year, but last year’s fiscal first quarter had 14 weeks. Putting that aside and comparing, well, apples to apples, unit sales rose 6%. Selling prices, meanwhile, rose an impressive 14.5% YOY, climbing by over $100 per phone.
Overall Q2 guidance did come in a bit light — but Apple said it expected iPhone sell-through to accelerate through the quarter. So, at the least, the bearish argument that the iPhone X might represent the peak — in terms of either units or revenue — looks disproved by the results. Apple isn’t done innovating — and consumers aren’t done paying up for those innovations.
So, I get the argument made by AAPL stock bulls like Dana Blankenhorn. The iPhone is intact. The rest of the business is performing well, with non-iPhone revenue up 11.4% in the quarter, per figures from the company’s 10-Q. Apple has a cash windfall coming — and Apple stock still looks cheap on an earnings basis.
But I can’t quite get there. The Q1 report assuages some of my biggest concerns about Apple stock; it doesn’t do enough, however, to change my opinion.
AAPL Stock Still All About the iPhone
Aside from the iPhone, the rest of the business almost doesn’t matter. The iPhone still accounts for 62% of Apple revenue. Given pricing increases, its share of profits no doubt is even higher.
And, remember, this is a company valued at almost $900 billion. The fact that the Apple Watch is outperforming Fitbit Inc (NYSE:FIT) doesn’t really change valuation; Fitbit (net of cash) is about a $1 billion business, 0.1% of Apple’s valuation.
CEO Tim Cook talked up HomePod on the Q1 conference call, but here, too, how big a launch does it take to move the needle? At 25 million unit sales, HomePod revenue likely would near that of the iPad — which generates less than 7% of total sales. Bear in mind that Amazon.com, Inc. (NASDAQ:AMZN), the leader in the smart speaker space, has probably sold around 30 million units — at much lower prices.
The non-iPhone business is tiny — and it’s not growing particularly fast. Revenue increased double-digits in fiscal 2017; for years before that, it had basically not moved. A big HomePod launch or a surprising increase in iPad sales (which have stabilized a bit of late), helps valuation a little bit — but we’re talking a few dollars at most on a $172 share price.
Apple Stock in the Eye of the Beholder
All that caution aside, I can see why an investor might like AAPL stock anyway. There’s a massive amount of cash going back to shareholders over the next few years, as I wrote last month. Valuation is not particularly expensive, and some of the likely stock repurchases on the way will drive EPS higher. Apple really doesn’t have to grow that much to support the current valuation, and the early performance of the iPhone X suggests it can drive modest growth — at least.
But with the post-earnings rebound, I’m not sure I see the valuation as all that compelling. Approximately 6% weekly unit growth is fine — but it’s not that impressive for what was a major iPhone launch. 11% growth in the rest of the business, too, is acceptable — but not enough to change the bull case, or offset any potential iPhone weakness.
From here, $172 looks about right. AAPL stock no doubt has lower risk than other mega-caps like Amazon or Facebook Inc (NASDAQ:FB). But unless growth accelerates from what the company has posted of late, it likely has lower reward, too.
As of this writing, Vince Martin has no position in any securities mentioned.