I’ve been a longtime skeptic when it comes to Apple (NASDAQ:AAPL), or at least Apple stock. And as the trillion-dollar valuation now assigned to AAPL stock shows, I’ve been pretty much dead wrong on that front.
I did start to come around last month, as AAPL cleared the $1 trillion figure. I argued that Apple stock might finally be headed for a period of normalcy — one in which investors stop focusing on and fretting about the next iPhone launch. After all, Apple remains significantly reliant on that product for sales and profits, and historically, AAPL stock has weakened after product launches.
That creates an interesting test for the stock at the moment. Apple’s annual launch event will take place next week. A leak late last month appears to confirm that the company will release the “iPhone XS” and the Apple Watch 4, and possibly a new iPad could be announced as well.
The question is: Will this time be different? Have investors moved on to valuing Apple based on its services business and its ecosystem? Or will “commoditization” fears return again, as they seem to once the company no longer has a new iPhone on the horizon?
The History of AAPL Stock and the iPhone
The run in Apple stock to $1 trillion plus hasn’t been a straight line. And, in fact, two of the bigger corrections in AAPL appear reasonably correlated to product launches.
Most notably, Apple stock crashed in late 2012, right after the release of the iPhone 5. AAPL stock rose 18% heading into the release and reversed two days ahead of the launch, dropping 25% in a matter of weeks.
In 2015, AAPL stock fell 20% heading into the release of the 6s. A brief rally followed that launch, but it quickly faded, and AAPL hit an 18-month low. It wouldn’t rally again until the second half of 2016, when buzz rose around the 7 and 7s.
It’s certainly possible that the movements aren’t directly correlated to the launches. In early 2016, for instance, the entire market corrected, which likely brought AAPL stock down with it to some extent.
Still, at the times when Apple has seemed furthest from a major iPhone release, the stock has tended to perform the worst. And the company probably is heading into another one of those periods this month.
Is Services Enough for Apple Stock?
The biggest near-term risk to AAPL stock, then, is that history will repeat itself. And the stock could be particularly vulnerable at the moment. AAPL has risen pretty much straight up for the last six weeks. It’s gained 20% in value just since late July, helped at least in part by a solid Q3 earnings beat.
If investors again start to worry about the iPhone’s future without a major release ahead, a pullback is likely. And it’s that “if” that is the most interesting thing to consider about Apple stock at the moment.
After all, it does seem like the narrative has changed here. Investors are focused more on the services business, for which CEO Tim Cook has set a $50 billion revenue target.
One only needs to look at Netflix (NASDAQ:NFLX), Spotify (NYSE:SPOT) or even SaaS plays like Salesforce.com (NYSE:CRM) to see what multiples investors will assign to “sticky,” high-margin recurring revenue. The idea of Apple as an “ecoystem” that can draw in and keep customers in perpetuity has led investors to pay more for the company’s profits.
Meanwhile, the iPad has stabilized, Apple Watch is dominating its category, easily displacing former leader Fitbit (NYSE:FIT), and the laptop and desktop businesses are holding up. With AAPL stock still cheap on an earnings basis, it’s possible that iPhone news is “good enough” this time around.
We’ll see. The iPhone still has generated almost 64% of revenue in the first nine months of Apple’s fiscal 2018. And I’m not yet convinced that the company has solved the “commoditization” problem or answered the concerns about such a hardware-reliant business.
Admittedly, at the moment, it seems like it has. Whether that shift is permanent should become clear in the next few months — if not the next few weeks.
As of this writing, Vince Martin has no positions in any securities mentioned.
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