The No.1 long-term driver of Apple Inc.’s (AAPL) stock has always been its ability to deliver innovative products with user-friendly interfaces. Steve Jobs, the deceased CEO of Apple, was known as its great visionary and innovator. When Jobs handed the reigns to former Chief Operations Officer Tim Cook in 2011, the biggest unknown was Cook’s ability to keep the innovation machine churning. Without innovative new product lines, Apple becomes the next me-too company, and its brand loses the luster of tech leadership. Long-term investors should keep an eye on the innovation pipeline, as well as its service offerings. In the meantime, Apple stock prices will likely be driven by the following five factors:
iPhone sales are the largest revenue generator for the company. In the third quarter of 2018, sales of the iPhone accounted for more than half of Apple's revenue and were 20% higher than the same period in the previous year. Increasing penetration in current and new markets resulting in share gains, particularly in China and other emerging markets, and successful launches of the next generations of the iPhone will likely drive sales over the next 12-18 months. Increased competition from Android phones could hurt market share and revenue, as well as increasing market penetration of smartphones.
iPad and Mac Sales
Tablet, laptop, and computer sales to both corporate and consumer users are an essential element of Apple’s revenues and stock prices. Sales of iPads and Mac computers combined totaled nearly 19% of Apple's revenue in the third quarter of 2018. However, the iPad and Mac laptops and desktops have lost market share recently to devices from other companies, so this revenue 10% lower than in the same quarter the previous year. In October 2018, Apple announced new versions of some devices: the iPad Pro, the MacBook Air and the Mac Mini at higher price points than their previous versions. Look for increased competition in this category to continue to impact sales and margins.
Services contributed nearly 18% of Apple's revenue in the third quarter of 2018, just slightly lower than iPad and Mac sales and a 20% increase compared to the same quarter in the previous year. Some industry experts, including Cook himself, have talked about services being the new foundation for Apple moving forward. Others argue that for that to happen, though, Apple needs to increase its number of users and license its iOS to other companies.
Among Apple's latest product launches is the HomePod, launched in February 2017. It's a smart home hub and speaker set to compete with the likes of the Amazon Echo and Google Home. As of October 2018, it has struggled to gain market share from competitors. The Apple Watch, launched in April 2015, has managed to stay at the top of the wearables market as of October 2018. However, none of Apple's new products have reached the success of the iPhone.
This is the intangible with the stock. Investors expect Apple to beat estimates, so a beat alone will not drive the stock price higher. The beat has to be higher than the so-called whisper number—the number of market participants expect Apple to post (usually higher than the estimate).
The Bottom Line
Apple’s incredible past success has brought with it brand recognition, desirable products, and a loyal consumer base willing to pay a premium. But it has also created a monster where the market expects, even demands, innovative products regularly, and presumes the company will consistently beat modeled revenues and earnings. Without the ability to keep the machine rolling with a strong pipeline of new and innovative product launches, the stock could fall, even with the huge cash position the company holds. Apple investors want growth, and when that growth is not delivered, the rotation from a momentum investor to a value investor, who does care about the cash, maybe quite painful.