Apple Inc. (NASDAQ:AAPL) stock has managed to hold at the $92.00 level, but the near-term upside of this $500-billion company is limited unless CEO Tim Cook can steer the maker of the hugely popular “iPhone” franchise in the right direction.
The problem is that Apple essentially derives about three-quarters of its revenue from the iPhone. This lack of revenue diversification can kill a company if not rectified.
A perfect example of focusing too much on one product was Microsoft Corporation (NASDAQ:MSFT), which, for decades, relied heavily on its “Windows” operating system and business software.
A dying PC market and move to mobile drove MSFT stock to reinvent itself as an innovator of sorts with its focus shifting to cloud applications, mobile, and gaming. The strategy shift saved Microsoft and the stock market is rewarding the stock.
Apple must also take a page from Microsoft’s playbook and continue to expand its impressive technology ecosystem away from simply relying on the iPhone.
Chart courtesy of www.StockCharts.com
What Apple Needs to Do
What makes AAPL stock worth a look is the massive more than $200 billion of free cash on its balance sheet.
A big war chest means Apple has time to pursue aggressive acquisitions and focus on the next big thing such as its “CarPlay” application to control a vehicle’s entertainment system.
Of course, speculation is AAPL is moving towards an Apple Car and autonomous vehicle technologies. This is the kind of innovative thinking Tim Cook must pursue in order to get investors and Wall Street excited about the stock again.
Much of the excitement towards AAPL stock arose when the company launched the “Apple Watch” to much fanfare. I didn’t get it, but there was so much hype over the watch, as it integrates into the company’s ecosystem of products.
So far, Apple has yet to provide solid numbers on how its smartwatch is doing, but news of a $100.00 discount for the watch at major retailers is causing some concerns.
Apple rarely discounts its products in order to protect its high margins. This has worked with the iPhone, but we are seeing more discounts in its “Macs” and “iPads.” The tablet business is taking a beating, with sales down some 25%, as users shift to the large-screen smartphones.
So a discount for the Apple Watch is not a good sign of pending sales, as it suggests slow sales and a move to rid inventory.
Simply look at GoPro Inc (NASDAQ:GPRO) and Fitbit Inc (NYSE:FIT) to see how they are also cutting price to try to drive sales volumes.
As many of you know, I have said these two companies are dead unless they can diversify away from being one-product companies or, better yet, find a buyer.
While the Apple Watch may be struggling to meet the initial lofty projections, Apple, unlike GoPro and Fitbit, has ample cash and time to figure things out.
By the way, I still think Apple should buy GoPro. With an enterprise value of approximately $1.0 billion after discounting in the $500 million in free cash, Apple could easily swallow up GoPro without much thought.
The valuation of AAPL stock at 9.4-times full-year earnings per share and a PEG ratio of 0.87 suggest value, but I don’t see the stock market assigning a higher multiple until Apple can demonstrate success of its other products and applications.
Wall Street estimates revenues will contract 2.7% in FY16, prior to growing 6.2% in FY17, when the “iPhone 7” will likely debut. The next generation of the iPhone better be a vast improvement over the “iPhone 6,” though.
For investors, they’ll need to wait and see what happens, as Apple works things out and convinces the stock market that AAPL stock deserves a higher multiple.