How Apple regained investors' favor

May 02, 2019 12:25
Apple has shifted investors’ focus from iPhone to other businesses. Photo: AFP

Apple, which positions itself as a digital service provider and hardware maker, has once again become the investors’ favorite after the company announced better than expected quarterly results.

Investors accumulated Apple shares on the back of the company's strong revenue growth from non-iPhone businesses and higher dividend payouts.

The stock surged more than 6 percent in early Wednesday trading to US$212, bringing the company’s market capitalization back to US$1 trillion.

The company first hit the US$1 trillion benchmark in August last year as investors bet on a potential upside from the new iPhone series released in September.

However, the high unit price and weak market demand prompted Apple to revise down its revenue guidance in late December, which triggered a massive selloff, bringing the stock price to US$148.

That proved to be the bottom after chief executive Tim Cook decided to lower the price of iPhone in selected markets amid a strong US dollar.

The company also shifted investors’ focus from the iPhone to other businesses, such as the Apple Watch’s health and fitness features as well as the launch of the new iPad Air and iPad Mini, which resulted in higher demand from its loyal fan base.

Along with the launch of a series of subscription-based services such as games, news and video, Apple was able to reduce its reliance on the iPhone.

In its press release regarding the latest results, Apple chose not to mention iPhone. The only hardware mentioned was the iPad.

The statement also highlighted the strong momentum gained by services, wearables, home and accessories.

This is understandable: iPhone sales dropped 17 percent from a year earlier. But the iPhone still managed to be a US$31 billion business. The company's signature product still accounted for 53 percent of its revenue during the reporting period.

Cook hinted that iPhone sales would be stable in the current quarter, particularly in China, following the launch of a trade-in scheme and the move to lower the selling price to match market demand.

And so while many investors expect continued recovery of iPhone sales in the near future, they also note a change in iPhone's pricing strategy.

What Apple wants investors to focus on is its service business. Apple's services category, which includes iTunes, the App Store, the Mac App Store, Apple Music, Apple Pay, and AppleCare, has become an increasingly important revenue driver for the company.

During the second fiscal quarter of 2019, Apple's services segment brought in US$11.5 billion in revenue, up from the US$9.9 billion in the second quarter of 2018. In fact, a new record has been reached for Apple services in this quarter.

Apple now has 390 million paid subscriptions across its services business, an increase of 30 million from the previous quarter. By 2020, Apple expects to pass the half a billion mark.

There is a huge room for Apple to boost its service penetration into its 1.4 billion installed base. The current penetration rate is just around 28 percent, and even with 500 million paid users, the penetration is still below 50 percent.

Against this backdrop, the launch of Apple News+ and Apple TV+, as well as the Apple Arcade, will play a key role in driving the growth of services.

While Apple is planning to return more cash to investors through higher dividend payouts as well as a US$75 billion share repurchase plan, research and development spending increased 15.7 percent to US$7.85 billion.

To be sure, R&D spending accounted for just around 7 percent of the company’s total revenue in the reporting period. But due to Apple’s scale, the amount is no chicken feed.

Apple still needs to invest in new hardware and technology such as augmented reality as well as autonomous driving. 

The company has to strike a balance between investors’ expectations and future growth.

In the meantime, investors love what they are seeing. That's the reason why Apple shares surged even if its core product sales recorded a double-digit year-on-year fall.

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EJ Insight writer