Apple (AAPL) shares took a hit Monday, falling as much as 3%, on worries that the company’s iPhone unit sales may falter and not recover until the second half of 2020.
If that concern sounds familiar, it should. Analysts have warned about Apple’s waning iPhone sales for the past five years. During that span, Apple stock has risen 110%, crushing the 51% rise in the S&P 500 during that same span. And this time won’t be any different. Apple is becoming less reliant on the iPhone and is transitioning itself into a full-fledged services company. Thus, the stock’s dip on Monday, particularly as its earnings is just a few weeks away, should be seen as a buying opportunity.
On Monday, Rosenblatt Securities analyst Jun Zhang downgraded Apple stock from Neutral to Sell. "We believe there is less reward for owning Apple stock after the recent stock rebound from stock buybacks and stable second quarter guidance," wrote Zhang. Adding, "We do not think Apple is a short (the company has plenty of cash and a meaningful stock buy back program); however, we believe Apple will face fundamental deterioration over the next six to 12 months."
Zhang’s point regarding the “recent stock rebound,” is noteworthy and underscores his own missed opportunity. While Apple shares are up some 27% year to date, besting the 17% rise in the S&P 500, Apple stock is up more than 18% since falling to $173 on June 3. Meanwhile, Zhang still maintained his Neutral rating through the dip.
This time, it’s iPhone sales he’s worried about, writing that the iPhone XS may have been "one of the worst selling iPhone models in the history of Apple,” warning that overall iPhone sales have been flat on a month-over-month basis from May to June.
"With limited upgrades for the new iPhone models in the fall and expectations of a 5G iPhone in 2020, we expect major iPhone upgrades to be pushed out to the second half of 2020," he continued. But here’s the thing: As noted, Apple is shifting its business to a services/subscription model, including its recent unveiling of the company's premium streaming video service called Apple TV+, which many observers perceive as an attack on Netflix (NFLX).
The company now also has a subscription news service called Apple News Plus, which curates news for each user in a section called "news for you.” The service will cost $9.99 per month. How about the company’s new gaming platform and its own credit card, which will be issued in partnership with Goldman Sachs (GS)?
That being said, these things will take time to hit revenues in a meaningful way. They are, nonetheless, potential catalysts that should keep investors interested in Apple’s pivot away from hardware.
On Monday Evercore analysts Amit Daryanani highlighted these prospects, saying it expects total App Store developer revenue to grow 18% to about $9 billion in the third quarter. "We think there is likely upside ahead when it comes to services revenues in the June-quarter, driven by a sizable acceleration in China-centric markets," Daryanani said in a note. Adding, "The reacceleration of growth in China is encouraging, while most other growth trends held stable.”
Daryanani point is that Apple earned roughly 18% of its total revenue from Greater China in its fiscal second quarter. In other words, there are far more important things to consider about Apple’s next couple of quarters than merely iPhone sales. The decline has been known for some time and the market doesn’t expect an uptick until the 5G phones begin to roll out. As I have been saying for some time, own Apple, don’t trade it.
At the time of publication, the author held Apple shares.