Despite a Bad Week, Apple’s Future Looks Bright
Apple closed this past week at $92.72. Since releasing its Q2 report the stock has dipped 4% and is down 10% on the year overall. This reaction is due to the first decline in year over year iPhone sales in the company’s history of 18% and a corresponding 13% drop in total revenue over the same period. On a lighter note, Mac sales decreased 9%, but this dip is less than the overall PC market which has experienced a 12% dip to open 2016.
Where does Apple go from here? The bar has been set very high for iPhone 7 based on the unprecedented success of iPhone 6. Where will growth come from? Many seem to think that more innovation and large acquisitions could spark growth. While innovation is always necessary in the technology space, more growth opportunities for Apple are closer than one may think. Currently, Apple has over 1 billion active devices in use. The company’s ability to leverage this enormous consumer base will allow them to create new revenue streams fairly seamlessly.
One way the company can leverage its consumer base is through services. Investors seem to be so caught up in the drops in iPhone, Mac and iPad sales that they are missing the services revenue segment that has been doing exactly what it is supposed to do… GROW!
In Q1 service revenue was up 15% and in Q2, despite revenues falling off, service revenue was up 20%. It is true that the service revenue segment only makes up 12% of total sales. However, when considering the way services like Apple Music and Apple Pay continue to gain traction with such a large consumer base, the company has a relatively new revenue stream that is full of growth potential.
Another growth opportunity that Apple has been exploring is in the enterprise space. Two years ago they entered into a deal with IBM to help customize mobile applications for specific markets and use cases.
The next step into the enterprise space was made in a recent announcement of a new partnership with enterprise software behemoth SAP. The agreement with SAP will focus on mobile productivity and applications. Seventy six percent of business transactions have contact with SAP systems. The combination of SAP’s large footprint and Apple’s enormous consumer base create very interesting possibilities for both companies moving forward.
Since Apple has resisted joining the enterprise space for so long, entering the space by creating partnerships with two industry leaders like IBM and SAP makes a lot of sense.
Since Apple has gotten so big, it is difficult for them to continue growing. However, their ability to leverage an extremely large consumer base with their service revenue stream, along with the expansion into the enterprise space bodes well for the company moving forward.
For those of you who stay up at night and concern yourself with the future of your favorite cell phone provided, do not fear. With such promising opportunities in the pipeline, this recent dip in stock price provides an opportunity rather that doom and gloom. For the value investor, it is a great time to establish a position in the tech giant or lower the average price per existing Apple share in your portfolio.