Apple Stock: iPhone Maker Needs More Innovation to Drive Its Valuation

Apple Stock Needs More Innovation
iStock.com/Kyryl Gorlov

Apple Aiming to Broaden Software Business

Things are probably pretty busy these days at the Cupertino, California headquarters of Apple Inc. (NASDAQ:AAPL), but the frenzy may be based more on what to do next to re-energize the company than on celebrating a game-changing innovation.

Many of you know I was bullish on AAPL stock due to my optimism that the company could reduce its revenue dependence on the “iPhone” and broaden its services business. The problem now is that Apple appears to be stalling in its progress.

The company recently announced that it would be cutting 190 jobs in its self-driving unit. Sure, it’s only a tiny fragment of the 100,000 or so employees working at Apple, but the optics are clearly not great. (Source: “Apple self-driving car layoffs hit 190 employees in Santa Clara, Sunnyvale,” San Francisco Chronicle, February 27, 2019.)

The area of autonomous vehicles was hoped to be a massive opportunity for Apple, with its “iOS” controlling the guts of the vehicle’s operations.

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Apple Stock Performance

For Apple investors, it has been a frustrating year; AAPL stock is down 0.5% over the past year, underperforming the S&P 500 and Nasdaq.

Apple stock is currently searching for some direction. It fell to a 52-week low of $142.00 on January 3, 2019 and remains well below its record $233.47 on October 3, 2018.

Chart courtesy of StockCharts.com

Apple’s Missteps Need to Be Rectified

Unfortunately, there doesn’t seem to be any major development at Apple, so again, what is going to drive Apple stock higher?

The company has been seeing decent growth in its ecosystem of devices and services, including the “Apple Watch” and its cloud business. As previously mentioned, the problem is that the scale of these areas is small relative to the iPhone’s contribution to revenue.

The reality is, since the launch of the Apple Watch, there has really been nothing to get excited about except for the stream of higher-priced new-generation iPhones.

Apple did introduce the “AirPods” wireless headphones costing around $160.00, but this is not what I would call revolutionary.

Then there’s the “HomePod” high-tech speaker at $349.00, but that product is in a very crowded landscape dominated by Alphabet Inc (NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN).

But Apple does have barrels and barrels of cash to spend. Other than increasing its dividend and buying back shares, Apple needs to make a big splash somewhere intriguing.

I guess the company could buy Tesla Inc. (NASDAQ:TSLA), valued at around $50.0 billion, and re-energize its autonomous driving unit. With a market value of around $825.0 billion, Apple could easily swallow up Tesla or another innovative company.

I’m not sure what Apple management is thinking at this time, but until the company can convince the stock market that it is more than a phone company, the prospects are unclear.

Analyst Take

Apple Inc.’s anemic revenue growth expectations don’t give me confidence in  AAPL stock.

Consider that, even at Apple’s current lower share prices, major shareholder Warren Buffett—via Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B)—wasn’t adding to his position. This makes you wonder whether Apple stock is a value play or value trap.