Apple: The Song Remains The Same – Seeking Alpha

It never ceases to amaze me the amount of information that is published an Apple (NASDAQ:AAPL) on a daily basis. Countless websites on a daily basis publish even the slightest news or rumor on AAPL.

Countless analysts also publish estimates on the company and work their models to the bone, trying to figure out what AAPL will report, so their clients might have an edge over everyone else.

Does all this information matter, when at the end of the day one wants to make an investment decision? My answer is no.

The latest craze pertaining to AAPL are services. For some reason analysts and pundits alike think that services will be the next big thing that might propel AAPL’s value to $1 trillion.

While APPL may indeed at some point be valued at $1 trillion, it will not happen because of a rise in service revenue. This much I can guarantee you.

Let’s look at Apple’s profits

As you know, when AAPL reported its year-end results back in September 2016, it recorded its first Y/Y lower revenue and profit in many years.

Then in its first quarter ending December 31, 2016, AAPL also reported something really strange. While revenue was higher Y/Y, net profit for the company was lower.


Now let’s look at AAPL’s quarterly revenue and profit picture.

AAPL Revenue (Quarterly) Chart

AAPL Revenue (Quarterly) data by YCharts

If you notice above, quarterly revenue and net income is more or less at par where it has been for many quarters now.

In fact, one wonders why AAPL shares have appreciated so much recently with revenue growth and profits increasing by miniscule amounts.

Let’s talk service revenue

The question is, why did AAPL report lower profits in Q1? It sounds a little strange if you ask me. I mean, especially since services are the up and coming revenue segment, that will propel AAPL to over $1 trillion in market cap.


If we look at the product revenue mix for Q1, we will notice that services were up by 18% Y/Y for AAPL’s Q1. However please note that this is actually down from a 24% increase from AAPL’s Q4’2016 report. So in other words, service growth seems to be flattening out on a sequential basis.

But how can service growth be flattening out? Isn’t service growth the next big thing? And the even bigger question is, why did AAPL report fewer profits in Q1 with services growing by around 20%?

Well one answer is that services are it still a small component of overall sales, around 12%. The second is that the biggest sub-component within services growth is AAPL’s streaming music service.

See, AAPL’s music service might be growing logarithmically (about 2 million paid users per month), but AAPL makes very little profits from it. How so? Well because we also know that Pandora (NYSE:P) and Spotify (Private:MUSIC) don’t make any money either. And the reason they do not make any money is because most of the revenue is a cost that is passed along to the music industry.

So while service revenue might be growing around 20%, half of that growth comes from AAPL’s streaming music division that’s probably making very little money, if it’s making money at all.

I have no doubt that the music division will end up having 100 million subscribers at some point, but do not expect much profit from it. And do not expect APPL to become a $1 trillion company based on services. At least not based on today’s data.

So why is AAPL’s share price at record highs?

The main reason is the chart below:

AAPL Shares Outstanding Chart

AAPL Shares Outstanding data by YCharts

The answer is the float. As long as AAPL continues to produce mountains of net profit – irrespective of growth – the stock will keep rising.

In fact, even with zero growth, AAPL’s stock should keep rising indefinitely as long as APPL repurchases shares on the open market.

And if the above chart is not evidence enough for you, the next chart below should be enough to convince you:

AAPL Market Cap Chart

AAPL Market Cap data by YCharts

In we look at the market cap of AAPL, it’s only about 10% higher than the highs of 2012 and lower that the high of 2015! This despite the stock recently roaring to an all-time high.

In other words, if it were not for stock repurchases, chances are that APPL’s stock might have underperformed the past several years.

Bottom line

The way I see it, AAPL’s stock has nothing to do with individual revenue segments, especially services. I mean yes, everything plays a role, however everything is still about the iPhone and its fat profit margins that still represent about 70% of total AAPL revenue.

I have no doubt the iPhone 8, or the rumored iPhone X, will be a another home run for AAPL. Why? Because it’s always a home run. Because AAPL’s next iPhone will be the best device it ever made, and will sell as good or better than every previous iPhone device, because that’s what always happens.

It does not matter what the specs on any future iPhone will be because whatever they are, they will be better than any other smartphone device and will have the gross margins that we have come to expect from AAPL.

On can rant all day about revenue segments, service growth and how great the next iPhone will be. However when coming to an investment decision, AAPL’s stock is still about share repurchases and the dividend, which currently yields about 2.25%.

As long as AAPL is able to make the profits it makes, even with no revenue or profit growth, the song will remain the same. And that song is mainly share repurchases.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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