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Why a New Credit Card Is a Big Deal for Apple Stock

Late 2018 was a rough time for Apple (NASDAQ:AAPL) and for Apple stock. AAPL struggled to sell iPhones, and, as a result, failed to live up to the expectations of investors and analysts.

Why Appple (AAPL) Stock Will Rise Even if iPhone Sales Don't Increase
Source: Shutterstock

Many downgrades of Apple stock followed, as analysts’ estimates for AAPL came crashing down. It became the consensus thesis on Wall Street that smartphones had already peaked, and that going forward, the growth of the iPhone business would only be derived from price hikes and a small chunk of switch buyers.

But Apple stock has staged an impressive comeback in early 2019 as investors have rallied around Apple’s potential to grow at healthy rates even with a flat iPhone business. Year-to-date, Apple stock is already up over 10%.

This rally is far from over. The truth is that Apple stock has huge upside over the long-term, thanks to the loyalty of its customers and Apple’s ability to further monetize them, using multiple, software-focused services. Thus, even if the iPhone business is flat, huge growth from a continuously expanding portfolio of software services will keep Apple’s revenues, margins, and profits on an uptrend.

Today, Apple stock trades at just 15 times analysts’ average estimate of the company’s forward earnings. That’s a pretty cheap multiple. Thus, as long as Apple’s revenues, margins, and profits remain on an uptrend, Apple stock will remain on an uptrend, too.

The bottom line is that AAPL can rise without robust iPhone growth. The company’s software business has enough potential – and Apple stock is cheap enough – to keep AAPL stock on an uptrend for the foreseeable future.

Apple’s New Credit Card Will Makes Waves

The bull thesis on Apple stock at this point is simple.

Apple may not be selling a ton of iPhones. But churn among the users of Apple’s smart devices is limited, and a huge number of people use Apple’s devices (depending on whom you ask, there are roughly 1 billion iPhones in use globally).

Thus, Apple has tremendous potential to monetize its huge number of users. So far,  it’s only scratched the surface of that potential. Over the next several years, Apple will roll out multiple, new, software-focused services which will optimally monetize its customers. As it does so, Apple’s revenues, margins and profits will head higher also, as will Apple stock.

This thesis is already coming to life. Apple has multiple, software-focused services which already have significant traction among its customers. Those services include Apple Music, which has surpassed Spotify (NYSE:SPOT) in the U.S. in terms of the number of its subscribers, and App Store, which is where all iPhone users go to buy apps.

But those are just two of what will inevitably be a portfolio of dozens of software-focused services which will help AAPL monetize its install base. The most recent potential addition to that portfolio is a credit card that Apple and Goldman Sachs (NYSE:GS) are supposed to be issuing  this spring. That credit card will be an iPhone-focused card, and it will be paired with specific iPhone features and help iPhone users better manage their money, according to the Wall Street Journal.

This credit card is a big deal.  Credit card users pay many fees. Thus, Apple getting into the credit card business means that it’s unlocking an entirely new source of sustainable revenue from credit card fees.

The revenue that Apple obtains from the card should also be quite meaningful. As mentioned earlier, there are about 1 billion iPhone users. Presumably, Apple’s credit card will be optimally synced with iPhones so that it’s more advantageous to iPhone users than other credit cards. If those advantages are meaningful enough, Apple’s new credit card could be adopted by a significant percentage of iPhone users.

Apple Stock Will Remain a Winner

An Apple-branded credit card is just one step of many that Apple will take over the next several years to create a robust portfolio of software-focused services. Taken together, those services will squeeze dollars out of Apple ‘s customers. Those new dollars will provide a material boost to Apple’s financials, and keep its revenue on an uptrend over the next several years.

Furthermore, all these new services are software-focused. Software sales almost always have higher margins than hardware sales. Thus, as Apple’s business pivots from hardware-focused to a hardware/software blend over the next several years, its overall margins should head higher, too. That means its profits will be boosted by a double tailwind, causing them to head way higher.

If its profits do end up surging tremendously over the next several years, Apple stock will head way higher, too. At its current valuation, AAPL simply doesn’t anticipate much growth. Thus, if its software businesses do grow meaningfully, AAPL stock will benefit from both earnings growth and multiple expansion.

The Bottom Line on AAPL Stock

iPhone sales have already peaked. That was a tough pill to swallow for investors in late 2018, so Apple stock dropped.

Now, though, Apple stock is rebounding because the market is starting to realize that the future of Apple is bright, even if its iPhone sales don’t increase. This thesis will gradually gain traction over the next several years as its new software initiatives generate a great deal of revenue. As that thesis gains traction, investors will flock back into Apple stock, and AAPL stock will head materially higher.

As of this writing, Luke Lango was long AAPL and SPOT. 

Article printed from InvestorPlace Media, https://investorplace.com/2019/02/why-a-new-credit-card-is-a-big-deal-for-apple-stock/.

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