While Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) Warren Buffet says he is not much of a techie, he has certainly done extremely well with his investment in Apple (NASDAQ:AAPL). Of course, Apple stock has had a pretty good run.
In a recent interview with CNBC, he noted: “We bought about five percent of the company. I’d love to own 100 percent of it… We like very much the economics of their activities. We like very much the management and the way they think.”
Who can argue with that? I’m really not sure. Apple stock is the first US company to reach a valuation of $1 trillion.
But going forward, it’s not going to be easy to keep up the growth. Even though the iPhone franchise is the most lucrative in tech history, it will not be enough to keep up the momentum, at least for the long haul.
The Future and Apple Stock
The nagging issue is that Apple has such a massive scale. Keep in mind that the annual revenues are nearly $230 billion, which ranks it number four on the Fortune list (this is right behind Berkshire Hathaway).
To put this into perspective, Apple would need to replicate the revenues of Dollar General (NYSE:DG) to grow by 10%!
So what can the company do? What will be the drivers to keep up the momentum with Apple stock?
Well, of course, a big key will be services, which include segments like Apple Pay, iTunes, Apple Care, the iCloud and the App Store. In the latest quarter, the revenues came to $9.5 billion, up from $7.3 billion in the same period a year ago.
Unlike the devices businesses which rely on new purchases and upgrades, the services business tends to be more stable and sports higher margins. Just look at the success of operators like Netflix (NASDAQ:NFLX) and Salesforce.com (NYSE:CRM).
There should also be a long runway for growth. This is especially the case for an Apple video service. According to Morgan Stanley (NYSE:MS) Katy Huberty, the revenues could reach $37 billion by 2025.
While all this is great, there probably will need to be more. And yes, the other driver is likely to come from the wearables business. In fact, this may wind up being the most important.
It certainly helps that AAPL already has a powerful ecosystem, which makes the devices much more useful. The company, of course, knows how to design standout devices as well.
Note that the wearables business generated $10 billion in revenues during the past year, based primarily on the Apple Watch (it is the clear leader in the category).
But going forward, the company looks poised to leverage these devices in lucrative areas, such as healthcare. According to a recent study, the Apple Watch was able to detect diabetes with 85% accuracy. The company has also been making great strides with its health record effort, which allows access via smartphones. There are 40 health systems and 300 hospitals that support it.
No doubt, the healthcare industry is massive. Based on data from the CMS, the spending is projected to go from $3.5 trillion in 2017 to $5.7 trillion in 2026.
Bottom Line on Apple Stock
Next Wednesday, Apple will unveil its new product offerings. It appears that there will be several iPhones, an upgraded iPad Pro and an Apple Watch. However, in terms of breakthrough innovations or cutting-edge functions, there is little evidence of such things.
And besides, there has already been a strong run-up in Apple stock ahead of the event, putting the price-to-earnings ratio at 20X. So right now, it’s probably best to wait on making an investment, as there will probably be an opportunity to get a better price as things cool off.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
