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Buy Apple (AAPL) Stock Based On Non-iPhone & Services Growth?

Benjamin Rains

Apple AAPL cut its holiday-quarter sales guidance last week in a move that shocked Wall Street and helped continue its three-month slide. CEO Tim Cook’s letter to investors detailed how lower iPhone sales, especially in China, are set to hurt Apple. Since then, Cook has tried to reassure everyone that Apple’s non-iPhone business can help drive the company forward.  

The Worries

Apple and Cook revised the company’s fiscal Q1 2019 revenue guidance to roughly $84 billion, which marked a roughly 6%, or $5 billion downturn from the low-end of Apple’s previous quarterly outlook that called for revenues between $89 billion and $93 billion. Companies issue subdued guidance every so often, but not Apple. The move marked the first time in over 15 years that it lowered its quarterly guidance.

The iPhone giant’s CEO said that slower sales in emerging markets, particularly Greater China, along with fewer iPhone upgrades, forced Apple to lower its quarterly sales outlook. Cook pointed to a slowing Chinese economy and the continuous trade spat as two major reasons for the slowdown in the world’s second-largest economy—which accounted for 18% of Apple’s revenues in each of the last two quarters.

Apple’s announcement also highlights how its high prices have held the company back in markets where there are a ton of less-expensive smartphones on the market. Meanwhile, Apple’s price points helped boost its overall sales in fiscal 2018 despite nearly flat iPhone unit growth. But going forward, Apple will now be forced to compare its results to quarters that include its new, high-priced iPhones.

Growth Beyond the iPhone

For years, Apple has actively expanded its business beyond its flagship smartphone. Plus, the company all but told investors last quarter that its days of substantial iPhone unit growth are over, at least for now, when it said it would no longer report unit sales. So where is Apple’s growth going to come from?

Cook, in a recent interview with CNBC’s Jim Cramer, laid out Apple’s plans for years of growth driven by everything but the iPhone. Apple’s non-iPhone business did jump by almost 19% last quarter, fueled by Services, Wearables, and Mac revenues.

Apple’s services segment features Apple Music, AppleCare, Apple Pay, and more. Last quarter, this unit jumped 17% to reach $9.98 billion. But this marked a significant slowdown from Q3 and Q2’s 31% expansion and fell in line with Q1’s 18% revenue growth. Meanwhile, Apple’s less-talked-about Other Products unit—AirPods, Apple TV, Apple Watch, Beats products—revenues surged 31% to reach $4.23 billion. Unfortunately, this marked the slowest growth of fiscal 2018.

Despite slowing growth in these newer businesses, Cook is confident that the firm’s massive active install base will set the company up for continued success. Apple’s install base reached 1.3 billion a year ago and Cook said it added about 100 million over the last 12 months.

Outlook

Apple reported just over $7 billion in total services revenue in 2010. That figure ballooned to over $41 billion last calendar year, and the firm recommitted to its promise to double its 2016 Services revenues by 2020.

On top of Apple Pay, which is part of the growing fintech revolution driven by the likes of Square SQ and PayPal PYPL, and Apple Music’s growing fight against streaming giant Spotify SPOT, the company sees its new health-based offerings as a major growth opportunity. “If you zoom out into the future, and you look back, and you ask the question, 'What was Apple's greatest contribution to mankind?' It will be about health,” Cook said.

The company rolled out a new Apple Watch last quarter that boasted more health-based features, including AFib monitoring. Looking ahead, Apple’s Q1 2019 revenues are projected to slip 4.75% from the year-ago period to $84.1 billion, based our current Zacks Consensus Estimate. Meanwhile, the firm’s full-year 2019 revenues are expected to sink 2.37% to $259.29 billion, as it reportedly cuts iPhone production.

Furthermore, Apple’s full-year 2019 earnings are only expected to climb by 1.6%. And its earnings estimate revisions have trended mostly in the wrong direction lately. With that said, Apple is a dividend payer that has massive cash reserves to help it return value to shareholders through buybacks.

Bottom Line

Apple’s cash on hand gives the company the ability to spend on innovations. Investors should also remember that Apple is projected to launch a streaming TV service to help it challenge Netflix NFLX, Amazon AMZN, Disney DIS, and AT&T T at some point within the next year.

Plus, let’s not forget that Apple has a history of simply inventing game-changing products. “You will see us announce new services this year. There will more things coming," Cook said in the CNBC interview.

With that said, shares of Apple popped 2% in morning trading Wednesday to reach $153.76. This still marked a 34% downturn from its 52-week high and could set up a solid buying opportunity for a company that isn’t going anywhere.

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