Anyone who spent the last year away from the stock market would be shocked at how much the perception of Apple Inc. (NASDAQ:AAPL) has shifted. The bears have torn into Apple over the last year. Even Carl Icahn, a long-time AAPL bull, quit the stock in search of greener pastures.
Weak smartphone demand forced AAPL stock into a spiral, stripping 20.3% from the firm’s market cap. There seems to be an almost universal understanding that Apple lives and dies by the demand for “iPhones,” “iPads,” and “MacBooks.” Since all three products aren’t selling the way they used to, it only makes sense to slash the outlook for AAPL stock, right?
Well, I’m not so sure. The company may not be able to keep its hardware sales growth up, but that doesn’t mean it’s gone completely flaccid.
Apple has more than one billion devices active across the world. If we think of hardware adoption as “Step 1,” then there’s still some hope for AAPL stock. The company has laid out a plan for “Step 2” of its growth, but most people were too busy freaking out about iPhone sales to notice.
No idea what I’m talking about?
Think about “Apple Music,” “Apple Pay,” and “Apple TV.” What do these things have in common? They’re all services that Apple provides for a fee. Rather than building out its physical product portfolio, Apple is going to squeeze more money out of each of its current customers. (Source: “The 13 biggest announcements from Apple WWDC 2016,” The Verge, June 13, 2016.)
Other companies have tried this process in reverse, so I’m confident that Apple can make it work with a hardware-first solution. The company set the ground early with “iTunes,” and that shows there was some forethought for “Step 2” of the plan.
Just as an example, think about Amazon.com, Inc.’s experiment with the “Kindle.” The company was putting brick-and-mortar bookstores out of business left and right, but that was only through its digital presence. Eventually, Amazon was compelled to release a physical reading device for its e-books. This cemented its market lead. Any e-books purchased through Amazon.com were only usable on the Kindle, thus keeping customers within the Amazon ecosystem.
Apple is trying to do the same thing with Apple Music and Apple Pay. These apps will only work on Apple’s devices. By creating incredible services that are exclusive to its existing devices, Apple is trying to tempt “Android” customers into switching. As Apple Music and Apple Pay pick up steam, we may see increased adoption of Apple iPhones.
Even if we don’t, both services could boost Apple’s revenue through marginal fees. After all, merchants pay a transaction fee on Apple Pay and customers pay a subscription fee for Apple Music.
To be honest, though, Apple TV is the real game-changer.
Apple TV and the Ace Up AAPL Stock’s Sleeve
Rumor has it that Apple is gearing up to release a set-top box with live streaming channels. What this means is that customers will spend a certain amount—say maybe $30.00 or $40.00 per month—for a highly curated set of channels.
It would be like Netflix and cable/satellite television combined—but with just the channels you really want. All of it would be provided through an Internet service, meaning you can pause, rewind, and record your favorite programs.
However, the real kicker—the ace up Apple’s sleeve—is that it may be the first online streaming service to sign a deal with ESPN. Live sports streaming hasn’t yet crossed the great digital divide, so it would be an enormous advantage for Apple to get first-mover advantage here.
So, stop worrying about Apple’s smartphone sales for a second. Instead, think about the company’s chances of success in Apple Pay, Apple Music, and Apple TV. Then go look at AAPL stock and tell me it’s not undervalued. I bet you can’t do it.