The iPhone’s Days as the Driver of Apple Stock Are Numbered
But the company's other businesses will pick up the slack
The phenomenal growth of Apple (NASDAQ:AAPL) has largely been driven by one product: the iPhone. For as long as many investors can remember, the iPhone has defined Apple. However, it’s 2020 and the iPhone’s days of being the primary driver of Apple stock value are over.
2007 to 2017: The iPhone Lit a Rocket Under Apple
Prior to the launch of its smartphone, Apple was on a roll. In the late 90s, Steve Jobs returned to once again become the company’s CEO. That was followed by the launch of the iMac and then the wildly successful iPod. By the start of 2007, Apple dropped the “Computer” from its name to reflect the fact that with the iPod it had increasingly become a consumer electronics company, not just a PC maker with a side business.
That summer, the company released its true game-changer, the iPhone.
Sales of the smartphone exploded and so did the value of Apple’s shares. The iPhone destroyed previous leaders of the mobile device like BlackBerry (NASDAQ:BB) and Nokia (NYSE:NOK). When the company celebrated the tenth anniversary of the iPhone in June, 2017, Apple stock had increased in value by 1112% since the iPhone was first announced. In comparison, the S&P 500 had increased by 60% over the same decade. Since then, AAPL has gone from $144.73 to $324.60 for an additional 124% gain.
That includes the recovery from a massive drop in the fourth quarter of 2018. Apple stock dropped 34% in just three months amid signs that the global smartphone market was in decline, and Apple announced that it would no longer report iPhone unit sales.
If the Era of iPhone Growth Is Over, What Will Drive Apple Stock Going Forward?
The iPhone still accounts for over half of AAPL’s revenue, but the days of record launch weekends causing wild rallies of Apple’s shares are clearly over. So what will come next?
In an email to InvestorPlace, Jack Choros, content manager for SophisticatedInvestor, laid out his thoughts on Apple:
“Apple stock is up over 100% over the last year. Contrast that with the fact the S&P 500 is up just 25% and investors who bet on the stock are winning big. Once the fear over coronavirus calms down in 2020 and the broader stock market bounces back, Apple stock will rise and fall based on its non-iPhone related businesses such as the revenue generated by wearables like the Apple Watch and their service business. The iPhone is the King of mobile technology. Apple’s future growth depends on other businesses.”
The revenue of the company’s services and wearable products are both growing quickly, and they are a potent combo. Wearables — the Apple Watch, AirPods and Beats headphones — bring in the big hardware dollars. Services, including Apple Music, Apple TV+ and Apple Arcade, bring in recurring revenue through monthly subscriptions.
Both also lift iPhone sales. In turn, iPhone buyers are more likely to buy one of Apple’s wearables or subscribe to one of its services. That “halo” effect is real, and AAPL leverages it to great effect.
The Bottom Line on Apple Stock
If you have doubts that wearables and services have the potential to significantly move the needle for Apple in 2020, there are some numbers that might help to make the case. In the fiscal first quarter of 2020, those two divisions brought in a combined $22.7 billion of revenue. That’s a 24.7% year-over-year increase from the $18.2 billion they brought during the same period a year earlier.
An estimated 30.7 million units of Apple Watch were shipped in 2019, outselling the entire Swiss watch industry in 2019. Sales of Apple’s AirPods wireless earbuds nearly doubled in 2019 (to the tune of an estimated $6 billion) and dominate the category. AppleInsider ran a report last year making the case that if AirPods was an independent company, it would have a $175 billion valuation.
Services has huge growth potential as well. For example, at last count Apple Music had 60 million subscribers. While the company does offer student and family discounts, at the base subscription rate of $9.99 that service alone could be worth $600 million per month in revenue or $7.2 billion annually.
With over 1.4 billion active Apple devices, the company has a huge user base to sell its growing stable of services to. And it has the ability to install apps on every one of those 1.4 billion devices when they are purchased or run a system update.
Apple stock is up 10% so far in 2020. Look for continued growth this year, but with wearables and services increasingly doing the heavy lifting instead of the iPhone.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.