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Apple's Revenues: Splintering

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About: Apple Inc. (AAPL)
by: Pinxter Analytics
Summary

Apple has enjoyed a decade of unrivaled growth in the smartphone market. But...

Running through the different business segments, both new and old, doesn't show a real way for them to replace stagnating iPhone sales.

With a busted rollout of IoT and Autonomous Vehicle Technology, the Apple Watch seems to be the only winner moving forward - unless they pull a rabbit out a hat.

All in all, I'm cautiously neutral on the company's year ahead after the rollout of the most recent, camera-infested, iPhone 11.

Back in 2008, in the height of the financial crisis, Apple (AAPL) released its first state-of-the-art smartphone and drew in billions in sales. Since then and up until the most recent reporting quarter, they've derived the vast majority of their sales from said iPhone after the iPod went the way of the dinosaur.

However, in recent quarters it has become apparent that the company will not be able to hold on to this dream forever as smartphone competitors have really caught up to the iPhone's "coolness factor" and improvements to existing smartphones came primarily from copying other companies like Samsung (OTC:SSNLF) or by making internal fixes like battery life and some performance features which don't make much of a difference to the average user.

Since then, the tech behemoth invested heavily in services which grew rapidly for a while, then into autonomous driving which it later dis-invested from and now it's tinkering with video streaming which seems to have gotten out of control as every company with a $1 billion to spare is moving to license as much content as they can. AI always had been an optimistic factor, in my humble opinion, given the expansion of the Internet of Things (IoT) and smart systems, but then Apple took its time rolling out its HomePod and HomeKit and things kind of stagnated from there on out.

And that brings us to today, the end of 2019, with analysts split over the sales boost effects of the newly released iPhone 11 with 1,200 rear cameras and increased performance to levels used by professional photographers and computer scientists. Some analysts say the demand will be soft even though the company itself downplayed expectations, and then a few days ago news came out that Apple increased parts orders by 10%. Classic.

iPhone Sales: Stagnant

It was notable when certain iPhones were released, like in 2014 with the iPhone 6 having significant improvements in quality and performance over the iPhone 5, which hiked revenues up low double digits for the following year, but it's unclear if Apple has that edge to release new and exciting devices anymore given the lackluster rollout of the last iPhones, including the iPhone X.

What seems to be going on now, and just to be clear - there's no wrong way to make money, is that Apple releases their version of the latest Samsung or Xiaomi phone a few months later and still sell tens of millions of iPhones, but nothing exciting enough to drive demand. Sales increases in the past few years were from price increases, something which the company now admits has a ceiling with their iPhone 11.

There's no telling when a truly exciting new feature will be released as part of a new iPhone, and that very well may be next year which will then drive a 25% increase in iPhone sales. But for the time being, stagnating sales is what's expected throughout September 2020 when an additional camera will be added to the back of the iPhone 11 and released as the iPhone 11s.

Services Growth: Approaching Bell Curve

The company made a smart move a few years ago and began using their loyal customer base who have integrated their various Apple products to offer different services like iTunes, Apple Pay and others which all caught on rather quickly and is not generating roughly $10 billion every year.

However, it's now apparent that this too is slowing down and will not continue growing forever as users seem to have peaked with their level of spending enthusiasm on the various services the company has to offer. Even though the company will continue to grow its user base along with population growth and some improvements in household incomes, the high growth rate seems to be stagnating for the time being.

Streaming: Limited Growth

If you are an average American you probably already have an account or access to an account with Netflix (NFLX) and Amazon Prime (AMZN), and if you have kids you'll probably be getting a streaming account with Disney (DIS) so your kids can grow up watching the same shows you did when you grew up. Or at least you hope so until they discover the latest and greatest.

The fact that Apple has a massive cash stream to develop its own content does not guarantee success in this area, and even if so - Netflix brings in $20 billion every year and makes very little money doing it. If we hop over into Narnia and assume that Apple will get all those Netflix subscribers to join their service, it will barely cover a 10% fall in iPhone revenues and won't amount to anything close to the profits that will be lost from that decrease.

Future Technologies: Lackluster Investment

Arguably, the two major technologies which are showing the most promise as we head into the third decade of the 21st Century are the Internet of Things and Autonomous Vehicle Technology. However, Apple seems to have dropped the ball with their rollouts and investment in these areas even though they do indeed have the R&D and cash resources to revamp development and speed up rollouts.

The Internet of Things, as I talked about in more depth in my previous article, is the connectivity of all the devices and "things" in your life. This manifests in the ability to connect your smart devices to your appliances in a secure way and control everything to make your life easier and more convenient like getting your coffee brewing from bed or getting dinner started on your way back home from a trip so you can spend more time outdoors. To put it bluntly, Amazon's Alexa and Alphabet's Google's Home Pod (GOOG) (GOOGL) took over this field rather quickly with their rollouts and partnerships with appliance companies to connect your life into one easy platform. Apple released their version of the HomePod late and with several glitches with no ability to securely connect to your major appliances without having a masters degree in electrical engineering or software programming.

In the autonomous vehicle segment the company has been inconsistent as well. They started up their Project Titan in 2012 but then shuttered it earlier this year only to follow up by snatching up a failing California company, Drive.ai, and is now testing their software on cars in California. Since these programs are secret it's unclear exactly how advanced the company is compared to rivals like Uber (UBER), Tesla (TSLA), Alphabet's Waymo, Nvidia (NVDA), Intel's Mobileye (INTC) and most major car companies as well as various private Chinese and European companies working with state funds.

The Bright Spot: It's Coming From Your Wrist

The Apple Watch is the one bright spot for the company's future. Even though they face growing competition from companies like Samsung, Huami's (HMI) new and exciting product launches, Fitbit (FIT) and other smaller companies, they remain the smartwatch manufacturer with the most active user base and with the easiest linkage to your smartphone and your home operating systems.

As mentioned in another article I wrote way back when, the prospects of the Apple Watch in the healthcare field alone are mind boggling. Health insurance companies already are discounting certain plans if you own an Apple Watch which is linked directly to your doctor to alert them on high blood sugar levels for diabetics or heart rates and blood pressure for those with high risk of heart disease. Apple's user base will allow them to capitalize off this by partnering with major healthcare companies and governments with universal healthcare systems, which can soon be in the United States as well.

And that's just the practical business side of things. The more human-focused approach to this is that the Apple Watch is actually saving lives and improving lives and lowering stress of those in danger of certain medical conditions. This alone will drive demand if the company continues to focus investment and improve these services within their smartwatch offerings, which they are.

Investment Conclusion

As stated, the company has multiple opportunities to drive sales and profits and it's not like they're suffering right now. After all, their services revenues alone are higher than Uber and Lyft (LYFT) combined. But it's unclear which stream will act as the primary shock absorber for stagnating iPhone sales, which have only increased due to the price increases from $699 to $999 per unit over the past few years.

All in all, I'm not ready to turn bearish on a company that makes so much money from so many different sources and has an R&D budget similar to the state budgets of Montana and South Dakota combined. Even so, I'm by no means ready to jump in on the promise of endless cash and revenues from new iPhones or from the launch of a streaming platform and would need to see serious improvements before turning bullish again.

All in all, I'm cautiously neutral on Apple's year ahead.

Disclosure: I am/we are long AMZN, HMI. 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.

Additional disclosure: Opinion, not investment advice.