New Chips May Not Lift AAPL Stock, But Apple’s Services Biz Is Booming


AAPL stock - New Chips May Not Lift AAPL Stock, But Apple’s Services Biz Is Booming

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Apple (NASDAQ:AAPL) hosted a pre-Halloween event Monday night to debut its new M3 line of processing chips, its latest MacBook Pro laptops and even an updated iMac desktop. But so far, investors are viewing the news as more trick than treat.

Shares of Apple fell slightly Tuesday morning. Investors might be underwhelmed by the new product releases. Or they may be just waiting for the bigger iNews coming from the company later this week. Apple reports its fiscal fourth quarter earnings on Thursday, Nov. 2 after the closing bell.

Wall Street is predicting only a slight increase in earnings per share from a year ago and a decline in revenue. That’s not incredibly exciting for a supposedly hot growth stock that also happens to be the most valuable company on the planet, with a market capitalization near $2.7 trillion.

Apple Earnings Set to Show Slower Growth

Although expectations for Apple’s earnings report are muted, the stock is still up more than 30% year to date. And if you dig deeper, there actually is a good reason for that. It seems that investors are betting on a continued boom from Apple’s services business, even as demand for computers, iPhones (despite the new iPhone 15 lineup) and iPads wanes.

Just look at the company’s third quarter results. Yes, sales of Apple’s products fell more than 4%. The only product category to report an increase in sales was the Wearables, Home and Accessories unit.

But revenue from services, subscriptions for things like iCloud, Apple TV+, Apple Music and numerous other App Store purchases, rose more than 8% to a record level of $21.2 billion. Services now account for more than a quarter of Apple’s overall revenue. By way of comparison, the once mighty Mac now makes up just 7% of Apple’s total sales. (iPhone is still the dominant money maker, generating nearly half of Apple’s total sales).

Given the recurring revenue from services, which many Apple users rely on, the stock still looks attractive.

Laura Martin, an analyst with Needham, who has a “buy” rating on Apple stock, said in a report after the Oct. 30 Mac event that “the best way to think about AAPL’s valuation, pricing power, competitive advantage period and barriers to entry is through the lens of more than 1B of the wealthiest consumers in the world, using >2B active AAPL devices an average of 5 hours per day.” She added that Apple’s goal is to boost its average revenue per user and lower churn by bundling add-on services.

Yes, Apple may be a slower growth company than it used to be. Analysts now expect average annual earnings gains of about 7% over the next few years compared to a more than 22% annual increase over the past five years. But Apple is still dependable. The company pays a dividend that yields 0.6%. Not as high as a Treasury bond obviously, but that dividend offers some stability in uncertain times. There is another level of safety with Apple as well, thanks to its fortress balance sheet. Apple had $166.5 billion in cash and marketable securities as of July 1.

The Bottom Line on AAPL Stock

Wall Street analysts are, for the most part, optimistic about Apple. According to TipRanks, 22 of the 31 sell-siders at top research firms have a “buy” rating on the stock. The consensus price target is about $203… 20% upside from current levels.

So, don’t be too concerned if tech fans aren’t gushing about Apple’s new chips, notebooks, and other hardware.

Let’s be honest. The company may never be as innovative under CEO Tim Cook as it was during the era of the late Steve Jobs. But as long as the services business continues to become a bigger and more important part of Apple’s revenue stream, the stock looks like a good buy that offers up the best of both worlds for growth and value investors.

As of this writing, Paul R. La Monica did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Paul R. La Monica is a veteran financial journalist with nearly 30 years experience (including more than 20 at CNN) covering the stock market and other asset classes, the economy and other corporate and business news.

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