Apple Inc. (NASDAQ:AAPL) has taken a breather over the past month that has escalated into a few days of backtracking. Apple hit an all-time high above $156 in May. A modestly disappointing Q2 earnings report then interrupted a big YTD rally, and Goldman Sachs’ big-tech warning last week has sent AAPL stock down 6% in just two days.
Still, Apple is up nearly 25% so far in 2017, adding some $160 billion in market capitalization in the process.
I still expect AAPL stock to trade relatively sideways until we get more color on the release date of the possibly delayed iPhone 8. And longer-term, I still see a significant concern for AAPL stock. Namely, the company continues to be reliant on the iPhone — if only because it has been such a major success that it dwarfs the impact of every other initiative.
The fanfare around the company’s announcements at its developer conference only highlights that problem. Apple has an $800 billion market cap. It literally moves entire market indices. Its size is such that new products are nice — but are barely a drop in the bucket in terms of the company’s overall profits.
And with real reason for concern regarding the iPhone, particularly post-2018, the same concerns that pushed Apple stock below $100 last year aren’t gone.
They’re simply being ignored.
WWDC and Apple Stock
The big news coming out of Apple’s WWDC (Worldwide Developers Conference) last week was the announcement of HomePod. Apple’s competitor to Alphabet Inc’s (NASDAQ:GOOGL) Google Home and Amazon.com, Inc’s (NASDAQ:AMZN) Echo adds to Apple TV in creating the Apple “ecosystem.”
It’s an interesting move, even if Apple seems somewhat late to the party. But it’s also highly unlikely to move AAPL stock at all.
Amazon Echo shipments reportedly will reach roughly 10 million this year. Assuming Apple could do the same at its reported $349 price tag, and at 60% gross margin, it would add roughly $2 billion in gross profit, pre-tax.
But Apple is expected to generate roughly $55 billion in after-tax income in FY18. And it’s highly unlikely that HomePod will come anywhere close to Echo sales, possibly even Google Home. HomePod is more of a high-end speaker, given that Apple’s AI assistant Siri clearly trails Amazon’s Alexa. It’s priced at roughly double the Echo, too, even ignoring the common discounting on the latter product.
HomePod was the “big” announcement for Apple out of WWDC. And even in an absolute best-case scenario, it likely adds maybe 3% to Apple’s profits. Even that ignores the fact that Apple is entering the market late, and with a product that early specs and Siri experience suggests isn’t up to Apple’s usual “best-in-class” standards.
The rest of the announcements simply aren’t enough.
Upgrades to the Mac line are nice, but Mac generated barely 10% of FY16 revenue, per Apple’s 10-K. There are some minor announcements that could drive growth in services revenue, a target of CEO Tim Cook. But Apple will likely to make an acquisition in that space — even if it’s not the speculated purchase of Walt Disney Co (NYSE:DIS).
iPhone or Bust for AAPL Stock
Again, the bull case for Apple stock comes back to the iPhone. That product drives 60%+ of sales and a likely higher proportion of profits.
That product also led to a downgrade from Pacific Crest Securities. PacCrest has said that potential delays aren’t priced in — but that’s only a near-term problem. The longer-term concern is that at some point, the iPhone will be commoditized, hurting Apple’s ability to take price and maintain its high margins. Apple might not be the next BlackBerry Ltd (NASDAQ:BBRY), but lower profits will mean a lower price for Apple stock.
Mizuho Securities followed that up on Monday, dropping AAPL stock to “Neutral” on the same idea that everyone has priced in the upside of the iPhone 8, but not the potential downside.
This has been the fear relative to Apple for some time. And there’s some evidence that phenomenon already is occurring in China. Investors seem to have forgotten that longer-term worry. It’s also possible that Apple’s huge share of market indices is leading to some incremental strength from index fund buying.
Whatever the cause of the recent gains, there is a danger here.
AAPL stock is dangerously reliant on the iPhone — and, in particular, the next iPhone. If that disappoints at all, whether in features or in delivery date, shareholders will suffer.
And from a longer-term standpoint, if Apple Inc. can’t find another growth driver, Apple stock will wither.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
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