They say it’s good to be the king. But it means you have a target on your back. This is as true for Apple Inc. (NASDAQ:AAPL) as it was for any other firm that was once the world’s biggest company, even as Apple stock looks at times invincible.
The market cap of $875 billion is admirable. The 2017 net income of $48.35 billion on revenue of $229.34 billion is awesome. The new “spaceship” campus, inspired by late co-founder Steve Jobs, is beautiful.
But investors don’t buy founders’ dreams, and they don’t buy the past. They buy the future. The future for Apple, with its crystal palace and profitable dominance of smartphones, is dominated by the target on its back.
Apple is generating enormous returns in a commodity market, where other manufacturers are barely breaking even. Governments see its profits as a rich vein of possible tax revenue. Its dependence on China for producing what it sells makes it vulnerable in a trade war.
But service revenues are booming, and it’s one breakthrough away from cracking the hardest mobile market of all.
The Target on Apple Stock
Apple is a huge target for patent trolls, non-operating companies that buy patents, define them broadly, then sue when a company implements what they call their rights. VirnetX, which had $1.5 million in revenue last year, just won a judgment of $502.6 million from a jury claiming Apple violated its patents on secure messaging.
This came from the notorious East Texas District Court, and Apple will continue trying to get the patents invalidated. But the loss would still represent just a 5% share of the $20 billion in net income it earned in just the fourth quarter of 2017.
The tax man is another problem.
Europe is cracking down on Apple’s tax schemes, making it pay in every country where it does business. It has enormous public support for this. Last year the European Commission dinged Apple for $15 billion for running its European revenue through Ireland, and that cash is now in escrow.
There are smaller problems, too. Its HomePod is getting killed by the Amazon.com Inc. (NASDAQ:AMZN) Echo. Smart speakers are the key to selling artificial intelligence to consumers. Repairmen are angry they can’t even fix old iPhones even with real Apple parts. Apple’s content strategy looks like a mess, and it’s phasing out its pay-per-song iTunes service in favor of the monthly streaming Apple Music.
Apple Stock Still Is Likable
There are two reasons why I still like Apple stock.
The first is services. The company is expected to earn $2.71 per share on $61.48 billion in revenue when it next reports May 1. An increasing amount of that will come from services, like Apple Music, recurring monthly revenue that has helped make Apple a “cloud czar” in just three years, as it built out a network of cloud data centers to handle the work.
Second is health. Apple’s health record initiative, giving people access to their health information through their phones, could become huge. With 40 health systems and 300 hospitals already supporting it, it theoretically meets all current privacy objections, and heavy investment will create a huge moat against competitors.
Recent studies showed the Apple Watch was able to detect diabetes with 85% accuracy. If it can ever get glucose monitoring working, and its heart sensor improved, Apple could take a big cut of the $3.2 trillion U.S. healthcare market, as 75% of it is spent on chronic conditions like diabetes and heart disease.
A lot of people laughed when CEO Tim Cook introduced the Apple Watch in 2014 but it could be his iPhone. If it can become a medical device, it will power the company’s market cap well past the trillion-dollar mark.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.