Along with the broader technology sector, Apple (NASDAQ:AAPL) endured a brutal stretch last week with AAPL stock falling 5.60% on Oct. 30, the day after the iPhone maker reported September quarter results that beat estimates, but contained some details market participants were concerned by. That overreaction is likely to wind up being opportunity for prescient investors.
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In the recently concluded quarter, Apple earned 73 cents a share on sales of $64.7 billion with both figures topping Wall Street forecasts. Apple topping fiscal fourth-quarter resorts isn’t surprising as the iPad maker has a lengthy history of thumping analyst estimates, but last week, investors appeared to latch onto sluggish iPhone sales and weakness in China – a marquee market for scores of US-based technology companies.
The matter of iPhone sales is easy to address. Apple is rolling out a new iPhone 12 5G so anyone buying the iPhone 11 in the September quarter would be purchasing some that would soon be rendered technologically obsolete. Just wait a few weeks and the shiny new object will arrive and it looks like plenty of consumers did just that.
Owing in part to the novel coronavirus pandemic, Apple’s China sales tumbled 29% to $7.9 billion in the most recently completed quarter. That was the lowest tally for the company in the world’s second-largest economy since 2014, according to Bloomberg.
Why AAPL Stock Is Still a ‘Buy’
Even seasoned investors can get caught up in China and iPhone data when it comes to Apple, but those factors don’t paint the entire picture. The company’s high margin services business, which includes offerings such as Apple Music, Apple Arcade, and Apple TV+ , continues flourishing.
In the just completed fiscal fourth, Apple services delivered $14.5 billion in sales, up $2 billion year-over-year. For fiscal 2020, the unit notched revenue of $53.8 billion, a $7.5 billion year-over-year increase. Think about that for a moment. A company with a market capitalization of $1.873 trillion, as of Oct. 30, has a division that delivered 16.1% top line growth in the midst of a global pandemic.
Underscoring the relevance of the services operation, Apple’s ability to marry hardware and software into singular, must-have devices remains a compelling trait and something few, if any rivals, can adequately mimic.
“Apple’s competitive advantage stems from its ability to package hardware, software, services, and third-party applications into sleek, intuitive, and appealing devices,” notes Morningstar. “This expertise enables the firm to capture a premium on its hardware, unlike most of its peers.”
A new services frontier for Apple is bundles on the Apple One platform where offerings such as Apple Arcade and Apple News will be grouped together in varying subscription plans. Prices are expected to range from $6 a month to $25 for a premium equivalent. Either way, this is a high margin gambit that delivers another steady subscription revenue stream tech investors crave.
This is important because data confirm that customers that buy multiple services from a single provider remain loyal to that company at rates that higher than those of customers that just buy one service or those that engage multiple providers.
Rare Opportunity
Globally, there are more than 1.5 billion Apple devices. That’s a staggering statistic for multiple reasons. Obviously, that statistic implies a massive runway for the iPhone upgrade cycle, indicating the company’s next set of quarterly results could knock the cover off the ball.
Second, with 1.5 billion-plus devices floating around out there, Apple just needs a modest percentage of those customers to latch onto to the new subscription, resulting in another revenue tidal wave.
With AAPL stock down more than 21% from its September higher, technically in a bear market, a rare opportunity is afoot to get this quality name at something of a discount before markets start accounting for the aforementioned catalysts.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.