It’s no secret that Apple, Inc. (AAPL – Research Report) has been in trouble lately. The giant iPhone maker got this new year started on a rough note. On Jan 2, CEO Tim Cook announced downward revisions to Apple’s forward guidance for Q1 FY19, and share prices dropped almost 10%. Since then, AAPL has partly recovered, but suffered a 2.25% drop on Jan 22. It’s all enough to make you ask, What’s going on? And more importantly: Is now the time to jump in? Let’s look at Apple’s recent history before we delve into the TipRanks database to check in with the analyst outlook.
Taking a Closer Look
Cook’s talking down the upcoming Q1 report was a start, but the truth is he didn’t really tell us things we couldn’t have seen for ourselves. Yes, China’s economy is slowing down, and yes, that’s going to hurt Apple. iPhone sales are down, and those numbers are worse than previously admitted, but tech geeks have been writing about the flaws in Apple’s iPhone pricing and sales model for a couple of years now.
And Apple knows that selling and pricing the iPhone series as a purely premium product won’t keep the sales numbers – and revenues – up in the long term. That’s why Apple released the iPhone XR; at $750, for an X model, it represents a significantly cheaper entry point to the series than other iPhone marks.
And right there was one of the problems. The iPhones have built their cachet as high-end devices, but the XR used an LCD screen as a cost saving measure. It was one of several features that were panned by critics, and the device – which was supposed to bolster Apple sales in emerging markets, and especially in China – simply did not catch on. iPhones make up 60% of Apple’s sales revenue. With sales dropping in China, and customers in Western markets holding their devices longer between upgrades, Apple cannot keep revenues up and rely on iPhones at the same time.
“Two Roads Diverged…”
That’s the background to recent reports that the company is yanking LCDs from the iPhone lineup entirely, starting in 2020. Whether they will keep the XR model (upgraded) going into that year is not known; what is known is that OLEDs are more expensive. Will Apple double down on its iPhone pricing, to keep revenues up? Or will they follow the route of the older Macs, and offer more powerful products to a more limited audience?
The new Mac Pros, with their smooth cylindrical form and no prepackaged peripherals, are already taking that route. But they were designed to appeal to power users; the iPhones were meant for a mass market. Apple is running into a reality now, that mass produced items for wide markets don’t always work with the premium pricing offered with niche items for narrower audiences. In the late 80s, Apple solved this problem by making Mac the name of choice for desktop publishing, music production, and gaming. Thirty years later, they’ll have to make a similar decision between mass audience or loyal niche, regarding the iPhone series.
“In the Valley of Decision…”
That’s not the only choice that Apple will have to make, going forward. The bigger choice facing Apple is that between hardware and services. We’re already seeing hardware’s share of company revenues start to fall – that was Tim Cook’s point, in his Jan 2 letter – and the obvious place for Apple to pick up that slack is with services.
The Services Division, which includes the App Store, Apple Pay, Apple Music, and more, is the company’s fastest growing unit. This was acknowledged by Cook, who when he revised down the forward guidance also let the public know that services sales hit $10.8 billion for Q1 FY19. It was the only solid result he disclosed, and it shows solid growth in the company’s second-largest division. Apple’s impending choice here is, should services be pushed at the expense of devices? It’s the growth sector; but whether its growth will be enough to offset declines in the hardware sales is an open question.
Getting Expert Advice
So what are some of Wall Street’s top analysts saying? AAPL stock has attracted the attention of three five-star analysts in recent days.
Amit Daryanani (Track Record & Ratings) of RBC Capital reviewed AAPL on Jan18, and believes that Apple’s lower stock price may “cause the company to rethink or tweak capital allocation.” Daryanani believes that Apple could increase its dividend, which already yields 1.9%. While that may not sound like much, it translates to $2.92 per share annualized.
An increase to the dividend would tend to attract share purchases by investors, boosting the share price – and also the dividend. This would be a viable strategy, if Apple simply wants to boost share price, as the company has the cash holdings to support a higher dividend. Daryanani sees a 20% upside to AAPL and gives the stock a $185 price target.
Canaccord’s Michael Walkley (Track Record & Ratings) also looked at Apple on Jan 18. He examined the company’s device sales versus growth in services, and wrote: “Despite expectation for slower near-term iPhone sales, we anticipate the company to continue to grow its installed base and believe the company's ecosystem will contribute to ongoing growth.” Walkley sees services as the driver for the company’s growth going forward. He expects that growth to be significant; his $190 price target suggests a 24% upside to AAPL stock.
The most recent review comes from Brian White (Track Record & Ratings) of Monness. Writing on Jan 22, White says: “We believe Apple will benefit in the long run from its shift to a higher percentage of sales from Services, low market share across key product categories, the rise of the global middle class, opportunities for new product areas that leverage Apple’s vast digital ecosystem and the growing trust [from] customers.”
White goes further, pointing out that Apple’s services are likely to hit $10.78 billion for Q1 FY19, an increase of 27% year-over-year. He describes key risks to the company, chief among them: “(1) Increased competition in Apple’s key product areas and pricing pressure; (2) consumer spending trends and the health of the global economy; (3) execution on the launch of new products and the penetration of new market opportunities…”
Despite the litany of risks, White believes that Apple has a clear track to remain profitable. His price target is aggressive, at $200, and implies a 30% upside to this stock.
Overall, AAPL holds a ‘Moderate Buy’ analyst consensus, based on an even split between ‘buy’ and ‘hold’ ratings. The average price target, $184, gives a 20% upside to the current share price of $153.
Author: Michael Marcus