What the Internet Trends Report Means for Apple Inc. Stock

Advertisement

AAPL stock - What the Internet Trends Report Means for Apple Inc. Stock

Source: Shutterstock

On Wednesday, respected analyst Mary Meeker released her annual “Internet Trends” report. And the report has some interesting implications for Apple Inc. (NASDAQ:AAPL), particularly with AAPL stock trading just off an all-time high.

The former analyst for Morgan Stanley (NYSE:MS) now works for VC firm Kleiner Perkins Caufield & Byers. Her take on past and future trends usually receives quite a bit of investor and media attention — and this year is no different. The 294-slide presentation contains a wealth of data and analysis about some of the most important developments in tech.

Many of those developments touch directly on AAPL stock. And from here, they support the skepticism I’ve detailed in the past, most recently last month. Most notably, the smartphone space — which remains the key driver of Apple earnings — looks like its growth has come to a halt. And that could be a problem for Apple going forward.

The Smartphone Growth Concern

One of the more interesting facts highlighted in the report concerns smartphone unit growth. According to Meeker, new unit shipments in 2017 were flat year-over-year.

For the most dominant company in the space, that’s a potential concern. Nearly two-thirds of Apple sales over the past four quarters have come from the iPhone. That’s why concerns about iPhone X sales hit AAPL stock earlier this year, before admittedly strong earnings assuaged those concerns.

But that slowing unit growth alone is a potential problem for Apple revenue, and earnings, going forward. Usage continues to rise, as the report points out elsewhere. That increased usage, however, doesn’t require new phones, given longer useful lives and increasingly “good enough” performance.

Meanwhile, what growth there is is coming on the low end. Smartphone pricing continues to decline. Chinese manufacturers, in particular, are seeing success. The market share of that company’s manufacturers exceeded 20% in 2017 — up from zero a decade earlier. As the report put it, smartphones are getting “better, faster, (and) cheaper.”

Those trends go straight to the core of the bear case for AAPL stock. So-called “commoditization” will come for the iPhone, just as it did for the PC a decade ago. That doesn’t necessarily mean that Apple is the next HP Inc (NYSE:HPQ) or Gateway Computer. But it does suggest an outlook of low, if not negative, revenue growth driven solely by pricing. And given the company’s reliance on the iPhone for profits, that in turn suggests meager earnings growth for Apple — at best.

Apple’s Leadership

Elsewhere in the report, it’s not hard to get the sense that Apple isn’t quite the tech leader it was a few years ago. Meeker spends a good deal of time discussing the huge amount of data generated by tech companies these days — and consumers’ willingness to share that data under the right circumstances. But it’s Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL)(NASDAQ:GOOG) seemingly winning in that space, thanks to soaring adoption (and usage) of the Echo and Google Home, among other factors.

Both those businesses are investing much more heavily in their businesses, as measured by spend on research and development plus capital expenditures. Apple is a relatively distant third, only modestly ahead of Microsoft Corporation (NASDAQ:MSFT) and AT&T Inc. (NYSE:T).

Indeed, combing through the slides, it’s not hard to think that Apple may have missed on some key trends. Online payments are exploding — but Apple Pay hasn’t been much of a hit. “Underwhelming” HomePod sales leave the company behind Amazon and Google. And while Apple is focusing on, and having some success with, its Services business, other platforms like Netflix, Inc. (NASDAQ:NFLX) and Spotify Technology SA (NYSE:SPOT) have seen much more explosive growth.

Indeed, for the world’s most valuable company, Apple feels a bit left out of the report. Where the growth in tech is most impressive — areas like software and data — is precisely where Apple is weakest. And with so much investment behind those growth efforts elsewhere, it may be difficult for Apple to catch up.

What the Report Means for AAPL Stock

While Meeker’s report is an interesting read, as always, it’s not necessarily a game-changer for AAPL stock. If anything, it only hardens the battle lines.

AAPL bulls will continue to point to a still-low valuation. There’s a windfall coming to shareholders over the next few years, as I’ve pointed out in the past. And there is some success beyond the iPhone, notably in Services, along with potential contributions from Apple Watch, HomePods, and even a potential rebound for the iPad.

But the bear case for AAPL still, at least, needs to be considered. And the Internet Trends report shows why. The world is moving quickly — but it very well may be moving away from Apple.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2018/06/what-the-internet-trends-report-means-for-apple-inc-stock/.

©2024 InvestorPlace Media, LLC