Apple Inc. (NASDAQ:AAPL) stock recently released quarterly results, which helped the company improve its uninspiring performance this year.
Apple stock, one of the reliable overachievers of Wall Street, has lost more than 2.2% year-to-date. However, the trend may have changed after investors and analysts seem to agree that the worst is over for AAPL stock in 2016.
Does that mean AAPL stock isn’t in the clear just yet?
While CEO Tim Cook didn’t exactly deliver stellar news, shares avoided tanking because Apple somehow mustered better-than-expected results, albeit still losing results. The lackluster performance has raised a bit of a dilemma for those who want to invest in AAPL stock.
Should You Invest in Apple Stock?
Revenue dropped 15%, but at $42.4 billion, the company managed to keep its revenue above the expected $42.1 billion thanks to higher-than-expected “iPhone” sales. As for iPhones in particular, the company sold 40.4 million units, which beat expectations of 39.9 million units.
But is Apple’s stock a “Buy” now and what is the Apple stock forecast? Apple stock in 2016 will remain volatile. Investors want to believe in a comeback and they are apparently willing to forego reality checks. They were willing to muster a bullish response even as Apple sales—when it comes down to it—simply proved they were dropping.
Yes, Apple also said that the iPhone is still able to draw customers into the company’s stores. Indeed, Apple suggested that iPhone sales have finally reached a bottom. (Source: “Apple reports second straight quarter of declining iPhone sales,” Infoworld, July 27, 2016.) Yet iPhone sales in key markets like China dropped by 33% amid growing competition with local brands. What does all this mean for Apple stock in 2016?
The key takeaway from the quarterly results presentation is that iPhone sales are dropping and Apple stock’s forecast cannot be all that stellar. This is especially so, as the Apple bulls were out in full force yesterday, propping up shares. Even so, a more bearish sentiment may return and prevail if the company does not start to take action to actually beat sales expectations rather than simply not doing as badly as some analysts expect.
The recent results—more than making the case for a bullish Apple stock forecast—suggest a more bearish course at best. The company’s results did nothing more than confirm the fact that Apple needs to find a new source of growth after the iPhone—and urgently at that.
The recent quarter represented the second consecutive quarter of decline. Apple must return to its profit-making ways soon. The tech sector is not forgiving and Apple has gotten its lesson in humility. See the chart for AAPL stock from August 2014 to August 2016 below:
Chart courtesy of www.StockCharts.com
Has Apple Lost Its Edge?
The average sales price also fell, which analysts have taken as a sign that consumers prefer the lower-end models of the Apple brand. There are also more signs of trouble ahead.
The iPhone is also not the only device showing signs of weakness. Quarterly sales of the “iPad” tablet are also down nine percent year-over-year to 9.95 million units, while “Mac” computers are down by 11% to 4.25 million units. (Source: Ibid.)
Neil Saunders of research company Conlumino interprets these widespread declines as characteristic of a company that while still having a lot of success, has lost the competitive advantage that once persuaded consumers to continuously renew their devices for new and more expensive ones. (Source: “Apple eyes services as iPhone factor dims,” ShanghaiDaily.com, July 27, 2016.)
If this firm wants to resume its stellar growth, the company needs to adopt a radical change in its existing product line or introduce a completely new device that creates a whole new market. Such developments may derive from the emerging technological niches, like virtual reality (VR), where Apple has a fighting chance at taking the forefront of development, as Tim Cook assured investors, adding that the company is investing heavily in this area.
Cook may be onto something when he speaks of augmented reality (AR) and VR developments. They could have an effect on the stock. To see proof of this, look no further than the “Pokémon Go” craze that has infested the world over the past few weeks.
Apple financially benefited from the millions of downloads of the Pokémon Go app, which points the company in the direction it needs to take to boost revenue. However, the tech giant also has to contend with some less-than-successful products in its product lineup.
Not long ago, Apple released its one true new product, the “Apple Watch.” Sales of the Apple Watch failed to match lofty expectations and the competition has increased fiercely and rapidly. The deflated potential of the Apple Watch has been one of the main factors to put pressure on Apple stock itself.
Research firm International Data Corporation (IDC) estimated that sales of the Apple Watch plunged 55% in the quarter ending in late June. The Apple division involved saw its revenue decrease 16% year-over-year. (Source: “Apple Watch Sales Fall 55% in Q2 as Consumers Wait for New Version,” eWeek, July 22, 2016.)
Conversely, the company’s services segment has some growth potential. These would include such products as “Apple Pay” (payments service/app) or “Apple Music,” a subscription-based music streaming app that recently commissioned 16 episodes of “Carpool Karaoke,” in which celebrities like Adele and Michelle Obama sing to music in a vehicle while driving. (Source: “Apple Inc orders 16-episode Carpool Karaoke series from CBS for Apple Music streaming service,” The Financial Post, July 26, 2016.)
The company may indeed welcome some growth from services, but with only $6.0 billion in revenue, it is still too little to offset the decline in its other revenue streams. (Source: “As iPhone Sale Sag, Apple Touts Apps and Services Instead,” ABC News, July 26, 2016.)
Tim Cook has always based Apple’s business on its attractive appearance and refined technology. But, if there is a secret to its success and future potential, it’s that the company has also mastered an efficiency of services to match its capacity for technological innovation. Perhaps, this is what’s most important to understand about the tech giant.
Yes, some of the company’s products have taken a sales hit, but they are still selling and major innovations are on the way—not the least of which might be technology for an “Apple Car,” which would be a tremendous showcase of all of the company’s technology.
While awaiting the arrival of new products, the company is strong enough to rely on “iTunes,” Apple Music, and its “App Store” revenues, in addition to revenue from services like Apple Pay and “iCloud.” These managed to offset any negative results to give the second quarter an optimistic character. As well, these products suggest that you can never discount this name. Despite some bearish pressure on Apple stock, the overall picture is actually bullish—the company has unlimited innovation and adaptation capacity.
Simply put, when it comes to its services, the company knows how to monetize innovation. To give you some idea, Apple earns by extracting a percentage each time a user downloads a song or an app or when a user subscribes to a service. And for every dollar spent in the App Store, the firm holds $0.30 and passes the remaining $0.70 on to the developer. Other income comes from the purchase of iCloud storage or the fees banks pass on to the company for every credit card transaction completed via Apple Pay.
Services have become an essential part of what the company does. The fact that these have growth potential represents a major pillar of strength for Apple stock.
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AAPL Stock Outlook 2016
Shares rose nearly seven percent after reporting stellar earnings last quarter. Investors applauded the fact that the main financial results are above analysts’ expectations. They may suffer some drops again, but it is reasonable to suggest that the share price is heading back to its highs of around $128.00—and it is still reasonable to predict higher peaks. So, even with due caution and diligence, the verdict for where Apple stock is heading is a bullish one.