It’s too little too late for Apple Inc. (NASDAQ:AAPL), at least in the short- to medium-term. As Monday’s much-hyped, but ultimately lackluster, investor event showed, Tim Cook is desperately trying to salvage his legacy in the post-Jobs era. Now, it seems the future is also post-iPhone.
The services business is front and center, but while Apple stock got a pop early Tuesday morning, it finished the day in the red and continues to trade below its Monday close. Not even appearances by Oprah and Steven Spielberg were able to dazzle investors into believing that Cook’s “unveiling” (the streaming service had been widely anticipated for some time) and Apple Card would be enough to power the $800 billion market cap materially higher. The event also shed little light on details regarding the TV streaming service, e.g. pricing and gaming services.
If anything, frustration continues to remain among investors. This special event would have been a huge hit if held five years ago. In fact, I had written a year and a half ago about why I thought Apple should buy Netflix, Inc. (NASDAQ:NFLX). It was clear that original content and viewing data would become extremely valuable. Apple now has to play catch-up and pay top dollar to do so. At the time, NFLX traded for approximately half the price it does now. That was just one of many missed opportunities and strategic missteps made by Cook.
AAPL’s First Quarter Earnings
The shift to emphasize services isn’t exactly a revelation considering deteriorating performance on the hardware side. The first quarter showed iPhone revenues declining 15 percent from the prior year, while the total revenue from all other products and services grew 19%. The numbers say it all. Do or die. This special event was survival masquerading as vision.
The reduced amount of transparency has been disconcerting as well. Going forward, iPhone metrics will no longer be provided. As a rule of thumb, less transparency does not bode well for the stock, especially when it marks a dramatic change from past methodology.
Apple Fumbles in China
China continues to be the elephant in the room for many companies, not just Apple. But this past quarter Apple made a major error in pricing, leading to the double-digit decline in iPhone revenues. The fact is that competition in the smartphone market has heightened and Apple is no longer the clear leader in smartphone popularity. Homegrown brands like Huawei and Xiaomi, the latter a unicorn in its own right, have innovated at an incredible pace and, anecdotally, the phones and camera quality in particular are impressive.
Given this backdrop, it’s surprising and somewhat confusing that Apple severely misjudged its pricing power in the Chinese market. The good news is that they know they need to reduce prices, so in that regard it’s an easy fix, but the overall expectations for earnings contribution also need to be revised downward and, given the shallow nature of the recent decline, it doesn’t seem like that is fully priced into Apple shares.
The Bottom Line on Apple Stock
There is a crisis of confidence in Apple’s leadership. The misallocation of capital — in my view, the share buybacks have been a net loser for Apple shareholders since that money would have been better invested in other ventures with higher returns on capital — is going to be a continued headwind as Cook and his team decide how to deploy the $130 billion of cash on their balance sheet.
There is potentially a catalyst there, in the form of M&A, which Apple has historically been very reluctant to pursue. However, if Apple doesn’t want to find itself left behind again, it needs to take drastic action. It can stem the bleeding in devices and efficiently monetize their user base to grow services. Barring that, Apple stock is going to be dead money for awhile.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.