Like the other cloud czars, Apple (NASDAQ:AAPL) stock derives much of its power from its network of hyperscale data centers, its “cloud.”
This makes it, like Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL) and Facebook (NASDAQ:FB), the economy’s landlord. Apple has powers akin to a government over developers and users.
Since the start of 2021, investors have been trying to figure out what this means. Shares are down 6% since January, opening June 1 at $125. That’s a market cap of $2.08 billion, 28 times last year’s earnings, about 6.5 times this year’s expected sales of $325 billion.
Compared to past years it’s a bargain. Apple stock has been falling gently even while revenues keep growing nearly 20% per year, at scale, and profits grow even faster. The question is whether the world’s most valuable tech company can retain its power.
The Threats to AAPL Stock
Apple’s growth has come under threat because, as Jimmy McMillan might say, “The rent’s too damned high.”
Critics call it the “Apple tax” but it’s the rent Apple charges all developers in its App store. The model, which has been adopted by the other czars, and smaller companies, is being challenged in court by Epic Games. Epic’s case was first described as “flimsy.” That changed after Judge Yvonne Gonzalez Rogers got Apple CEO Tim Cook to admit that gaming’s in-app purchases, and Apple’s 30% cut, are subsidizing its whole free app ecosystem.
European regulators are making a similar charge on behalf of Spotify (NASDAQ:SPOT), calling the App store a monopoly. Apple’s treatment of Netflix (NASDAQ:NFLX), bending the rules on behalf of a big partner, haven’t helped its case. Apple’s willingness to bend, either to big partners or big governments, has created a cloud of doubt around its cloud profits.
The Juggernaut
Unlike Google, Facebook, or Microsoft, however, cloud services aren’t Apple’s big profit center. Service revenue in its most recent quarterly reported represented just 18% of revenue, down from 22% a year earlier.
Apple remains a hardware juggernaut. It’s the fate of the iPhone that has two brokers screaming sell. While the iPhone 12 has been a hit, these analysts think its success is unsustainable.
Apple’s margins on its hardware are lower than for services, but they’re still a massive 38%. These could even expand in the future, as it continues to design its own chips. A second benefit is that Apple chips let Apple unify the Mac and iPhone lines for the first time – one operating system to rule them all, without a manual.
Apple’s iOS won’t just cover phones and PCs, but virtual reality goggles, home automation systems, and the Apple Watch, where it competes with the other czars. Facebook is the key competitor in goggles, Amazon in home automation and Google in wearables. The power of the cloud is leading to a war over your entire computing environment, and over time, everyone will have to choose a side. Once that happens, the czars can even command your wallet.
The Bottom Line on AAPL Stock
Apple is not a democracy. But your purchase of an iPhone represents a powerful consent for you to be governed by it.
Apple may be forced to bend the knee to the most powerful governments, like China’s. But unless a government has its own, alternate tech ecosystem, Apple can’t be overthrown. But it’s not easy being a government. You’re responsible for enforcing all the laws you promulgate.
Uncertainty over the fate of our tech overlords is slowly transforming them from growth stocks into value stocks. This includes Apple. Its price will continue to be move sideways, its PE dropping. But its growth and power will sustain continued long-term investment.
On the date of publication, Dana Blankenhorn held LONG positions in AMZN, AAPL, FB and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.
