I’ve been a skeptic toward Apple (NASDAQ:AAPL) for some time. But as Apple stock chugged higher to $230 in early October, I admittedly threw in the towel. The new iPhone lineup, including the iPhone XR, seemed to prove that the company could sell devices at ever-higher prices. With AAPL stock still reasonably cheap by traditional metrics, it seemed unwise to fight the tide.

But the long-running fears I’ve had toward Apple’s growth have spread. Lowered guidance ahead of fiscal Q1 results highlighted weakness in China. The end of the iPhone cycle removed a catalyst for Apple stock– as has been the case in the past. And suddenly, the entire market is worried about the “commoditization” of the iPhone.

And with that worry, the problem becomes clear for Apple stock. It is exceedingly difficult for the company to grow profits if it can’t continue to raise prices on the iPhone. The product accounted for 62.7% of revenue in fiscal 2018, according to the 10-K. iPhone revenue, helped by the iPhone XR, grew 18% in FY18 — but on the back of a minimal (less than 0.5%) increase in unit sales. In fact, Apple isn’t even disclosing unit sales going forward, suggesting that the figure likely has peaked.

With 63% of revenue and a huge chunk of profit at risk, what’s Apple to do? Wedbush analysts have an idea. But their report only seems to highlight the fact that Apple is in a tougher position than bulls — and a seemingly cheap valuation — would suggest.

Services, M&A, and Price Cuts on the iPhone XR

In a report released Monday, Wedbush analysts Daniel Ives and Strecker Backe assigned a $200 12-month price target to AAPL, representing 30%+ upside. They also discussed what had driven AAPL stock down and what could bring it back up.

The firm wrote that “Apple’s pricing hubris on iPhone XR” was the key factor in the guidance cut. The firm estimates that of 350 million iPhones worldwide that could be upgraded in the next 12-18 months, some 60-70 million are in China. With prices in the market still too high, Apple is ceding too many of those sales to cheaper options from in-country rivals like Huawei and Xiaomi.

Cutting prices would build out the installed base. Building out the base would add new users for the services businesses, which has become an increasingly important aspect of the bull case for AAPL over the past few years.

And, the firm recommends, the company then should enter the content space on the back of those users, with several M&A targets cited. The “highest-probability” options are privately held studio A24, Lionsgate (NYSE:LGF.A,LGF.B), and Sony (NYSE:SNE) Pictures. Viacom (NASDAQ:VIA,VIAB) and even Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) are mentioned as well.

The recommendations do make some sense. Apple’s Services business has grown impressively, with revenue up 53% over the past two years combined. The existing user base could drive a content offering. And Apple likely needs to do something with its cash pile that now totals about $237 billion.

But the recommended strategy actually highlights the problems here. And from here, it makes the $200 price target look like a stretch.

The Problems for Apple Stock

The problem, again, is the company’s reliance on the iPhone. Services revenue has grown 53% in two years. But it totaled $37.2 billion in FY18 — barely one-fifth that of the iPhone. Wedbush’s estimate of 750 million active iPhones suggest the company makes about $50 per phone per year worldwide.

Cutting prices and trading, say, $200 in revenue — and essentially, profit — for $50 in annual revenue isn’t a good deal. It isn’t a deal that, even with high margins in services, jumpstarts growth. And it highlights the problem with the bull case for AAPL being based on services: the business simply isn’t that big. The iPhone is so huge that it nearly by itself moved Apple stock to a $1 trillion-plus valuation, however briefly. Nothing else — not services, not the Apple Watch or the iPad — can really move the needle.

Wedbush itself cites “how critical China is” for Apple moving forward. That’s a problem in the middle of a trade war that CEO Tim Cook has admitted raised anti-American sentiment. Even the Services business faces a risk as companies like Netflix look to avoid the “Apple tax” on iOS apps.

As for M&A, Apple is way behind. Netflix is dominating streaming. AT&T (NYSE:T) is attacking the space. There’s Hulu and Amazon.com (NASDAQ:AMZN) and even Facebook. How does being a second-tier player in content offset the loss of pricing power in smartphones?

The AAPL Valuation

The qualitative case here simply seems to fall flat. Services is a valuable business, no doubt. But Apple still has a market capitalization over $700 billion — a ‘valuable’ business isn’t good enough.

Wedbush seems to understand that. Its model values Apple on the whole at about $950 billion, and the business at ~$820 billion net of cash. Services accounts for a stunning $400-$450 billion of that total.

That number values the Services segment at 11-13x FY18 revenue, and probably ~10x FY19 numbers. Both multiples are similar to those of NFLX — a stock that pretty much every AAPL stockholder thinks is badly overvalued.

From here, that number looks prohibitive. Wedbush admits the valuation is the subject of a “big debate”. From here, with no content edge as yet, and worries about more large customer sidestepping the 30% fee in the Apple Store, it looks close to absurd.

And that’s a problem for AAPL. If a bull needs a double-digit revenue multiple on Services to model substantial upside, then there’s clearly real reason for worry about the iPhone. If an investor can’t justify that $400B+ figure — and I certainly can’t — then AAPL at best is an avoid, even at the lows.

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