AAPL Stock: Is Apple Stock Overpriced?

AAPL StockLike a high school sweetheart that went away for college, Apple Inc. (NASDAQ:AAPL) is one of those investments that “got away.” I know plenty of investors who regret not buying Apple stock in early 2001, because AAPL stock shot up 11,200% over the next 15 years. They drown in tears when looking at the Apple stock price.

But that era has passed. Now that we’ve seen Apple stock drop by more than 20%, it’s obvious that the AAPL bears are lurking in the shadows, ready to pounce when the company shows a sign of weakness. In fact, you may not recognize AAPL stock if you’ve spent a year away from the stock market. The change in perception is astonishing.

Investors tore into Apple stock to the point where Carl Icahn, a longtime AAPL bull, quit the stock in search of greener pastures. The question is why? What made investors change their tune on the hottest stock of the last two decades?

The answer is simpler than you’d think: weak smartphone sales. A drop in “iPhone” demand forced AAPL stock into a spiral, stripping 20.3% from the firm’s market cap. Investors seem to think that Apple lives and dies by its device sales. So if sales of the iPhone, “iPad,” and “MacBook” are slowing down, then AAPL stock is worthless, right? Wrong.

Apple stock isn’t just a bet on hardware products. That was just Step one of the company’s plan, but they also have a Step two that can propel Apple stock to new heights. No idea what I’m talking about? Let me explain…

Step 2 Can Boost AAPL Stock Outlook 2016

Apple is pivoting towards business lines like “Apple Music” and “Apple Pay,” both of which exchange a service for a fee. There’s no manufacturing involved, nor any shipping or retailing costs. These are simply apps to make use of the Apple device you already have in your pocket, which is why they can ignite a resurgence in Apple’s stock price.

Anyone who owns an iPhone, an iPad, or a MacBook is the target market. Considering that Apple has one billion active devices across the world, the potential is massive. (Source: “1 billion Apple devices are in active use around the world,” The Verge, January 26, 2016.)

They effectively built a loyal hardware following, which was Step one, but now they can charge those users money for software-based services. That’s Step two.

It’s a brilliant move that could send AAPL stock surging.

Integrating a physical product with services has proven a winning strategy for many technology companies. Just think about the Kindle from Amazon.com Inc. They first found success by selling books online, which is just a software service. But the real win came from the invention of the Kindle. It was meant for reading e-books.

Amazon offered customers a way to buy cheap electronic versions of books, and also a portable device on which to store them. In other words, it integrated hardware and software in such a way that customers had to buy both. Apple is doing the exact same thing, but on a much bigger scale. Just look at Apple Music and Apple Pay.

One would turn your smartphone into a wallet, and the other would give you access to an incredible amount of music. Merchants would have to pay Apple for every transaction and customers would have to pay a monthly subscription for Apple Music.

Both of these income streams could help drive a rebound in Apple’s stock price. I’m betting that when investors see services becoming a bigger portion of Apple’s bottom line, they’ll rediscover a passion for AAPL stock.

That being said, there’s one service that could be bigger than either Apple Pay or Apple Music. It’s called “Apple TV.”

An Ace Up AAPL Stock’s Sleeve

Although shares of Apple stock took a beating last year, the company’s expansion into online video streaming could help reverse direction. At its Worldwide Developers Conference (WWDC), the company disclosed more details about an upcoming Apple TV.

Some analysts thought that given Apple’s dominance on every other screen, the company would naturally extend that dominance to physical televisions. However, it doesn’t look like that’s going to happen; no one really expects a physical Apple TV.

Device sales are falling across the board, so rather than walking down that perilous road, Apple is releasing a set-top box similar to what your cable company provides. This set-top box will stream an Apple TV service through the internet. By pulling this off well, Apple could send AAPL stock into its very own renaissance period. (Source: “The 13 biggest announcements from Apple WWDC 2016,” The Verge, June 13, 2016.)

The company obviously saw the writing on the wall. They knew device sales were about to plateau, which is why they shifted gears towards services. Apple Pay and Apple Music could certainly bolster Apple’s stock price, but not half as much as a video streaming service could. Apple TV is the edge of the sword.

Think about it: Apple is taking the fight directly to Netflix, Inc., and in doing so, has set itself up for huge gains. AAPL stock could surge if the company successfully nudges its massive userbase into this program. The incredible proliferation of Apple devices makes that task significantly easier, not to mention that it can be packaged along with Apple Music and other services. But there are some potential hurdles.

Some critics might ask why, if someone already has Netflix, would they also sign up for Apple TV? I think there are two reasons. For one thing, Apple has the cash to outbid Netflix for popular content, so it can actually poach shows that people want to watch.

But that alone wouldn’t turn me bullish on Apple stock. What’s far more convincing is that Apple is reportedly signing deals to include live streaming channels. Better still, some of those channels could feature live sports, which is something neither Netflix nor Amazon Prime can offer. It is a huge advantage for Apple.

Live sports programming is the last thread holding people to their traditional cable packages. One study showed that 43% of U.S. adults said they won’t give up cable TV because of live sports programming. This is despite the fact that 45% of U.S. adults think cable TV is a waste of money. No wonder ESPN charges 12 times the normal cost per subscriber. (Source: “Apple’s new TV service will have the one feature that will scare the heck out of cable companies,” Business Insider, March 18, 2015.)

I think the future of AAPL stock depends on Apple TV. It’ll take an enormous amount of revenue to replace the growth of iPhone sales. One of the only ways Apple could do that is by becoming a main distribution source for television.

Live streaming means that you could switch on your Apple TV and there would be a constant flow of programming. It would operate like traditional TV channels, but you could also access a library of movies and TV shows. You’d basically have the freedom of a Netflix-style service while also enjoying the benefits of old-fashioned programming.

Sometimes you don’t know exactly what you want to watch. Or maybe you’re exhausted from a long week and are just looking for whichever basketball game is on TV. In such cases, Netflix can’t help you because it puts the burden of choice on the viewer.

Traditional cable wasn’t like that. I’m sure we can all look back to moments when we discovered a new show or movie while flipping channels. Those moments of serendipity were precious, but cable companies made them overly expensive by also charging for channels that no one watches. Les Moonves, the CEO of CBS Corporation, admitted that people only watch about 15 to 17 of their total 200 channels. (Source: “CBS CEO Les Moonves Full Session (2015 Code Conference Day 2),” Re/Code, May 10, 2016.)

The Bottom Line on AAPL Stock

That’s why Apple TV will only have about 20 channels. They’ll be highly curated to match viewers’ tastes, but at least they’ll reignite the hope of chance discoveries. When combined with the live sports angle, I think Apple stock has a winning narrative to sell to investors.