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Summary

  • Apple's fortunes remain tied to hardware, with iTunes apps and songs a tiny portion of the whole.
  • Apple stock is riding high ahead of its September 9 new product launch.
  • Rumored services are unlikely to move the needle. Once products launch, sell.

Apple (AAPL) is continuing to race ahead prior to its September 9 press event, where it's expected to launch bigger versions of the iPhone and tease the iWatch.

But shareholders should be focused on a different question, which is whether Apple can make it as a services company?

At some point, as markets saturate, Apple has to make this transition, and it's clear the company has yet to do so. Results from iTunes music and app sales remain a tiny part of the whole. Most of the headlines regarding its cloud services, like relating to celebrity nudes, remain negative.

Bulls continue to claim that the stock is cheap, priced at 11.5 times forward earnings when Apple's cash haul is taken out, or about 14 times forward earnings. [The actual P/E, based on its most recent earnings, stands at 16.7, still barely half Google's (GOOG) (NASDAQ:GOOGL) 29.7 but well ahead of any other computer hardware company.]

How much of its present price is real and how much is spin?

Apple has been here before. Before its seven-for-one stock split it peaked at $700/share - the current price is 3% past that post-split high. For those who bought Apple shares steadily during its fall, like me, owning the shares has been a very pleasant experience. My final basis in the stock came to a pre-split $452, meaning I'm up 60%.

Is it time to ring the register?

The company is expected to make some service-related announcements next week. It has reportedly followed Amazon.com (AMZN) and Starbucks-backed (SBUX) Square into becoming a "merchant aggregator" - able to sign-up merchants for credit card transaction processing like any Independent Service Organization. The move doesn't mean it's doing payments, mobile or otherwise - it means it will be collecting transaction data and passing it onto processors. If you like this move, hang on to your Visa (V) shares.

The company is also reportedly signing up medical industry partners for its HealthKit software. Instead of having wearable data used only by fitness buffs, the idea is that numbers would go directly to doctors, better for patients but at a cost. Apple hopes providers who already have connections with the FDA would be getting their applications approved for use rather than Apple doing this work itself - it's the cost and hassle of FDA approval that has stopped wearable technology in the past.

Apple's plans could easily be stopped by a government demand that the HealthKit software itself be certified as a device, rather than just having devices using it approved separately.

Will all this be enough to move the services revenue needle or has Apple "lost its creative mojo," as the Harvard Business Review asks. Apple is not now and never has been a technology innovator. It is a technology popularizer, a company that knows how to turn technology ideas into profitable products.

No one doubts that the company will achieve positive financial results from its new announcement, even while its actual market share continues to fall against the onslaught of cheap Android kit. Even in the U.S. market Android now out-sells iOS by nearly 2-1 and on a global basis it's getting ridiculous.

Apple is becoming a Michael Kors (KORS) of mobility, the winner in the high-end segment but nowhere in the mass market. At some point that impacts developers' willingness to divert resources to the platform. Where is the tipping point? And when does Apple service revenue become more than a pimple on the elephant?

These will be the reasons Apple shares eventually roll over. Will it happen on September 10, or when the new hardware is delivered? It will probably be closer to the latter date, and you'll want to lighten up on your own Apple holdings by that date.

Source: Can Apple Become A Services Company?