Apple Inc. Earnings Preview: Could This Spell Trouble for AAPL Stock?

Apple IncAAPL Stock Faces Serious Challenges

Apple Inc. (NASDAQ:AAPL) fell out of the market’s good graces after it reported lower “iPhone” sales last quarter. Investors took it as a sign of impending doom for AAPL stock, so they trampled over each in a race for the exits. Now it looks like it could happen again.

Apple reports earnings after the bell today (Tuesday, July 26) and rumors are swirling that we could see a repeat performance of last quarter’s decline. Apparently iPhone sales haven’t picked up in the past three months, which supports the idea that this is a secular decline.

Investors have been terrified that Apple is reaching a plateau. They think the company is a lame duck now that device sales are sputtering to a standstill. I’m not sure we should be carting AAPL stock off to a retirement home just yet, though.

What Does This Mean for AAPL Stock?

The stock may still have some legs if Apple can leverage service revenue from its broad base of iPhones, “iPads,” and “MacBooks.” There are myriad ways of squeezing more money out of each customer—the question is if Apple can execute those strategies.

The rest of the market doesn’t seem to consider those avenues as legitimate paths to a higher stock price. They would rather have AAPL stock live and die by iPhone sales.

That’s a silly way to look at a company with the intellectual and financial resources to do whatever it chooses. Yes, Apple’s past was built on device sales, but investing is about the future. Everyone who can afford a smartphone may have one already, but that just means the question now is, what Apple can do about that? The company has an answer…

You can see it written in “Apple Music,” “Apple TV,” and “Apple Pay.” These are all services that have very little—if anything—to do with the company’s production to devices.

It’s abundantly clear that Apple is building for the future, but it’s equally clear that AAPL stockholders are stuck in the past. Let me give you a concrete example. The recent craze over “Pokémon Go” isn’t just a win for Nintendo—it’s a win for Apple, too.

The company has a 30% revenue-sharing model with developers of Pokémon Go’s in-app products. Since the app itself is free, Apple is basically getting almost a third of all money being made. Analysts estimate this could shake out to approximately $3.0 billion of revenue.

Pokémon Go is just one video game, but it was the first to integrate elements of augmented reality (AR). Considering the game’s enormous success, I expect to see a host of imitators before long. After all, nothing inspires quite like success.

Soon there will be dozens of imitations for other video game franchises, giving Apple even more chances for revenue. Not all of them will be as big as Pokémon Go, but together, they could fill the hole made by fewer iPhone sales.

Nonetheless, that transition will take months, if not years, and Wall Street doesn’t think in such generous terms. The Street doesn’t see beyond the next quarter. If you own AAPL stock right now, beware the coming earnings announcement.

The previous sell-off happened quickly. On April 14, AAPL stock was trading at $112.10. Pessimism was swirling around the share price ahead of the company’s earnings announcement, which pushed AAPL stock down to $104.35 ahead of Q1 earnings.

The Bottom Line on AAPL Stock

Then came the bombshell on Tuesday, April 26. News of fewer iPhone shipments went viral, causing a flurry of panic that sent AAPL stock down 10.17% by the end of the week. That means Apple lost more than $50.0 billion of market cap in a handful of days.

Deserved or not, if the company reports fewer-than-expected iPhone sales again, I see AAPL stock taking another nosedive.