Analysts have been calling an end to Apple's "Super Cycle" since the introduction of the iPhone X in September 2017. They've also been predicting that the stock is headed lower. Yet earlier this month, on June 5, shares of Apple (NASDAQ:AAPL) hit an all-time high, just a hair under $194.
Looks like the majority of analyst calls on the direction of the stock were dead wrong. However, their assessment of Apple's Super Cycle may be on point.
Slipping iPhone Unit Sales But Profit Forecast Beats
The Super Cycle analysts are keenly focusing on is the virtuous circle of regular iPhone upgrades by loyal Apple customers that drives new smartphone sales for the company and brings in additional users at the same time. In the company's fiscal second quarter which ended March 31, iPhone sales inched up just 2.9% as the company sold 52.2 million units.
That number was 15% lower than iPhone sales for the same quarter three years ago, suggesting it won’t be possible for the company to attract more customers for its newest, highest-end model, the iPhone X. That was the bad news. But the good news is that Apple is still making plenty of money and was able to beat analysts’ profit forecast for Q2.
As such, why isn't Apple getting much more love from analysts? According to Strategas Research, Apple stock now has the lowest number of buy ratings since 2009.
One key factor keeping many analysts on edge is the company’s narrow revenue base. The iPhone generates 62% of Apple's total revenue and an even larger percentage of its profits. In the past two quarters, Apple sold 129.5 million iPhones.
That's little changed from the same period a year earlier. On June 8, citing industry sources, Japanese financial daily Nikkei reported that Apple expects to ship 80 million new model iPhones this year, down 20% from what it had planned at the same time last year.
With this disappointing outlook hanging over the company, investors would be smart to wonder whether this is the right time to buy Apple stock—when the share price is near its peak and the company's market cap is just $90 billion shy of Apple potentially becoming America’s first trillion-dollar giant.
The Stock Is Still Cheap
On valuation metrics, we see Apple stock as still cheap. Even as profits have surged 13-fold in the past decade, investors still aren't paying a higher multiple to own this stock. At 18 times reported earnings, Apple shares are the cheapest among all companies that have a market cap of at least $500 billion, according to Bloomberg data. If you compare Apple to other tech giants such as Alphabet (NASDAQ:GOOGL), Google's parent, and Microsoft (NASDAQ:MSFT), Apple’s earning multiple looks very compelling.
The other positive factor supporting our bullish case for Apple is that Chief Executive Officer Tim Cook's plan to counter this slowdown in iPhone sales, by improving the company's services business, is working. Indeed, Apple’s total revenue rose 16% from the quarter a year ago, helped by surging sales in the company’s services business.
Revenue from services jumped 31% to a record $9.2 billion in the past quarter. The App Store, Apple Music, iCloud storage and Apple Pay all generated record sales. Currently, Apple can sell users of its devices a growing list of services that work seamlessly with all Apple hardware.
This isn't an insignificant number either. During fiscal 2017, Apple sold 217 million iPhones, more than 40 million iPads, and almost 20 million Macs. As a result, the company now has 270 million paid subscribers across its apps and services, up by 100 million from the same period a year ago.
On the strength of these initiatives, Apple predicts its revenue will beat analyst forecasts in the three months ending in June, rising as much as 18%.
Bottom Line
For investors who want to buy and hold Apple stock for the next few years, you haven't missed the boat. We believe Apple’s services segment will generate double-digit growth per year for the next five years, gradually making up for losses from slowing iPhone sales. As long as the company continues to sell devices each year at a reasonable pace, and is able to diversify sales away from the iPhone, the health of the smartphone industry will continue to become less relevant for Apple.
If that's not convincing enough and slowing iPhone sales remain a red flag, keep in mind that Apple has a cash hoard of over $250 billion. And Apple isn't hesitant about using it. The company has announced a new, $100-billion share buyback plan. That's after spending $23.5 billion in repurchasing its shares during the first quarter, the biggest quarterly buyback in U.S. corporate history.
We believe that's a great weapon with which Apple can support its share price, even during dips. Which of course would make the stock an even more a attractive value investment.