Pros and Cons for AAPL Stock
Apple Inc. (NASDAQ:AAPL) lost a big chunk of its market capitalization after reporting earnings in April. But once the immediate panic had subsided, many investors started asking themselves one question: is AAPL stock ripe for the taking?
Most of you know that I am generally bullish on large-cap technology stocks, but the Apple question requires some unpacking. You see, Apple’s share price has long been driven by the monumental success of “iPhone” sales.
AAPL stock shot through the roof as iPhone sales were going up. The smartphone maker even eclipsed titans like Exxon Mobil to become the world’s most valuable company. All of that success was due to the iPhone.
So naturally, the stock crashed when iPhone sales dipped for the first time in…well, ever. At no point in Apple’s history has the company ever faced a crisis quite like this.
Let me explain…
Everyone who can afford a smartphone already has one. In business, we call this “market saturation.” Apple, Samsung, and the rest of the smartphone makers have to face this one fact: almost everyone they can sell to has already bought their products.
We’ve finally reached “peak smartphone.” It was a good run while it lasted, especially for Apple. The company managed customer loyalty much better than any of the other device makers. But the growth spurt is nearly over.
Consider this: there are roughly two billion smartphones in use today, but the global median wage is just $1,225 (annually). That means half of the world’s population lives on less than that amount. Meanwhile, an ordinary iPhone costs hundreds of dollars. (Source: “Number of smartphone users worldwide from 2014 to 2019 (in millions),” Statista, last accessed May 12, 2016.)
And on top of that, you need a wireless plan and electricity to use the phone. Otherwise, it’s just an expensive paperweight.
Imagine if you were living in a poor third-world country. Things are getting better in your economy; your wages are rising and life is improving. You can afford a nicer home, better food, and new clothes. But smartphones would still be a luxury.
That is an ugly truth Apple needs to face.
Like I said, there aren’t that many potential customers left. Even existing smartphone users are straining their wallets to keep up with the latest editions. They have to buy smartphones, tablets, and laptops: it’s exhausting.
But let’s be clear here—Apple is far from dead. It drew in $50.6 billion in sales last quarter, a number that puts most other companies to shame. (Source: “Apple’s Tim Cook: No reason to panic over recent earnings,” CNET, May 2, 2016.)
The firm’s CEO, Tim Cook, appeared on CNBC to defend his company’s performance: “We just had an incredible quarter by absolute standards, $50.0 billion plus in revenues, $10 billion in profits. To put that in perspective, the $10 billion is more than any other company makes. So it was a pretty good quarter but not up to the Street’s expectations clearly.” (Source: Ibid.)
While that’s a reasonable point, he forgot to mention that sales were down 13% from the same quarter a year before. Markets found that to be inexcusable.
After all, a company’s stock price isn’t supposed to reflect current profits. It’s supposed to be based on future profits. Since Apple sold fewer iPhones than before, investors were pessimistic about the direction of Apple’s profits.
What made matters worse was a slowdown in Chinese demand. Sales in the Greater China region fell by 26%, which investors took as a major blow. The country had represented a final frontier of growth for iPhone sales. (Source: “Apple’s second-quarter earnings in charts,” Quartz, April 26, 2016.)
But Apple still has its fans. They continually herald Apple’s tremendous success in other product lines as proof that the stock could recover. The “Other Products” segment was up 30% year-over-year and services increased by 20%.
Without context, those numbers are enormously impressive, but don’t get blindsided by them. Apple is such a large company that even an extra billion dollars wouldn’t move the needle.
The company’s monstrous size really prevents its stock from flying too high.
That being said, if Apple can find a way to squeeze more money out of its existing iPhone users, its profits could rebound and then some. I’m thinking in particular of “Apple Music” and “Apple Pay”—two initiatives with huge potential upside.
Every iPhone user already uses “iTunes,” so integrating Apple Music was a logical step in the company’s growth. It is already one of the biggest players in music streaming.
But once again, the hiccup in Apple’s plan came in China. The government recently decided to shut down certain parts of iTunes. Apple is currently working to resolve those issues, but unless it’s able to do so quickly, I’m going to remain wary of AAPL stock.