AAPL Stock: This Small Segment Could Be Huge for Apple Inc. Next Year

AAPL StockThis Could Be Massive for Apple Stock

Apple Inc. (NASDAQ:AAPL) stock recently had the second-largest one-day rise in its history, but it’s not because of “iPhone” sales. In fact, if you ask any Apple stock bear, they’ll tell you that the company’s future is doomed because iPhone sales just had another quarter of double-digit year-over-year declines.

Here’s why the bears are wrong on AAPL stock and the recent rally is here to stay.

Why the Apple Stock Bears Are Wrong

To Apple stock bears, there is only one number you need to tell them: $13.0 billion.

That’s the amount of money the company returned to shareholders through dividends and buybacks in its fiscal third quarter alone. Heck, that’s more than some hot tech companies’ entire valuations and Apple just handed it over to investors in three months. (Source: “Apple Reports Third Quarter Results,” Apple Inc., July 26, 2016.)

But Apple isn’t a startup anymore. The reason why some new technology companies can carry sky-high valuations is because investors expect those companies to generate massive profits in the future. Apple is already in that profitable stage. It’s time for shareholders to be rewarded.

Right now, AAPL stock has a dividend yield of 2.18%. The company is also under a $250-billion capital return program. The company has completed almost $177 billion of that program so far.

Apple is unique in the tech field, though, in that it doesn’t talk about its future products until their official launch. For instance, everyone knows that Apple is going to unveil the “iPhone 7” in September, but Apple hasn’t confirmed that—it’s just rumored so far. Some rumored features and specifications of the device seem to be widely accepted as fact, yet the company hasn’t even mentioned the product in its earnings report.

On that front, you have to give Apple’s chief executive officer, Tim Cook, credit for doing a good job at the earnings conference call. He did not mention the iPhone 7 even once, which could be a good thing, as it gives us a better idea of Apple’s potential without the introduction of a new flagship product.

When asked about where growth would come from in the next quarter and the timing of the new iPhone model, Cook said, “we’re not going to get into products or product transition.” Instead, he mentioned that the company saw “a number of encouraging signs” in the last quarter. (Source: “Apple Timothy Donald Cook on Q3 2016 Results – Earnings Call Transcript,” Seeking Alpha, July 26, 2016.)

In particular, he told analysts that there were a number of countries with double-digit growth in the reporting quarter, including Brazil, Japan, and India.

Another Fortune 100 Company Within Apple Next Year?

And then we have the mighty installed base of the iPhone. The device wasn’t even around 10 years ago. Now, the Cupertino, California-based tech company has sold more than one billion iPhones. (Source: “Apple Celebrates One Billion iPhones,” Apple Inc., July 2, 2016.)

This is a testament to Apple’s brand appeal and technology prowess. One billion iPhones sold doesn’t just mean that the iPhone is the best-selling smartphone of all time; it also makes the iPhone the most popular product of all time.

Having such a large installed base on just the iPhone alone is a huge milestone for the company. Moreover, it also creates endless monetizing opportunities. With so many users in Apple’s ecosystem, the iPhone maker now has a booming services segment.

Apple’s services segment, which includes Internet services, “AppleCare,” “Apple Pay,” and licensing, was already growing at a double-digit pace in the previous two quarters. This time, revenue from services grew 19% year-over-year to a June quarter-record of $6.0 billion. (Source: “Apple Inc. Q3 2016 Unaudited Summary Data,” Apple Inc., July 26, 2016.)

Growth in services revenue was mainly driven by the company’s active installed base of devices. In the quarter, installed base-related purchases surged 29% year-over-year to $10.3 billion. In particular, revenue from “App Store” grew by 37% to a new all-time high.

In the past 12 months, Apple’s revenue from services improved by $4.0 billion year-over-year to hit $23.1 billion. The company expects its services segment to become the size of a Fortune 100 company next year.

The Bottom Line on AAPL Stock

At the end of the day, don’t forget that Apple stock is still inexpensive even after its second-largest one-day rise. Closing at $104.21 per share on Friday, AAPL stock is trading at a little more than 12 times its earnings. If you use expected earnings for its next fiscal year, you’d see that Apple stock has a forward price-to-earnings ratio of 11.71X.

Multiples like these are extremely low in today’s bloated technology sector. Sure, the $500+-billion company probably won’t grow as fast as a startup. But with valuations being so low, any type of good news—such as a booming services segment—could trigger a sizable rally in Apple stock.