Apple Stock: Why Investors Shouldn’t Fear the Sell-Off

Cupertino-based tech giant Apple Inc. (NASDAQ: APPL) unveiled its new tenth-anniversary iPhone X model last week, an event which was highly-anticipated by the public and investors alike. Nevertheless, the unveiling of the much-hyped new iPhone sparked a sell-off in Apple stock, as share prices fell to around $158 following the launch event, despite trading at $164 at the beginning of the month.

Apple’s falling share price following

Apple’s falling share price following the Sept 12 iPhone X launch event. Source: Bloomberg

I would assert that the fall in valuation is largely due to spectators concerns regarding product pricing, insofar that the new model of the iPhone will hit the market at a hefty $999 starting price. However, despite such red flags over the pricing of the company’s most profitable segment, it doesn’t seem as if investors should turn their backs on the stock just yet, for two reasons primarily.

 

  • A Weak US Dollar will Help Drive iPhone Sales

 Despite the fact that the price of the iPhone X is much higher than previous models, Morgan Stanley claimed on Tuesday that sales shouldn’t be impacted by the high price due to a weakening US dollar. In a note to clients, analyst Katy Huberty wrote: “An aspirational brand, high customer loyalty, and weaker USD allow Apple to increase prices without hurting demand.” That is, the value of the dollar has fallen by 10% this year, and so a weaker US Dollar compared to several international currencies, including the Euro, Brazilian Real, Indian Rupee, and Chinese Yuan, will help to offset the recent USD price increases.

 

What’s more, China is already set to be one of the fastest-growing markets for Apple, according to Huberty. “China remains a key driver of our above consensus estimates, where the number of iPhones due to be upgraded grew 56% this year setting up for a powerful upgrade cycle,” the bank claimed. So, if Apple anticipates a large share of its iPhone X revenue to come from overseas sales, then the hike in USD price will make very little difference to foreign customers due to the weak exchange rate. On such a note, Huberty chose to raise her fiscal year 2018 earnings per share target by 7% to $12.60.

 

  • The Services Sector is Flourishing

Additionally, the company is gradually becoming less and less reliant on its iPhone sales for revenue. Even though iPhone sales brought in a staggering 69% of Apple’s total $78.4 billion revenue last quarter, Tim Cook’s enterprise has been shifting its attention to another segment for an additional boost as of late – namely the Services segment.

Apple has a goal to double its Services segment by 2020, implying services revenue of about $50 billion over the next three years, which Cook proclaimed back in the January earnings call. The company looks to be on track to hit its ambitious goal after reporting an all-time quarterly services revenue record of $7.3 billion in August. That represents an impressive 22% year-over-year increase from the $6 billion reported in the period one year prior.

As Cook stated in the earnings call, “over the last 12 months, our services business has become the size of a Fortune 100 company – a milestone we’ve reached even sooner than we had expected.” What’s more, Apple CFO Luca Maestri noted on the call that Apple was up to 185 million paid subscriptions across all of its services, suggesting continuous growth within the segment.

So to conclude, Apple was a great buy back in 2007 when the very first iPhone landed on the market. Yet due to an expensive business model that affords greater focus to the burgeoning Services segment, as well as a weakening US dollar which will offset price increases to the most recent conception of the iPhone, the company remains a good buy a full decade later.

(Kathleen Craig, Research)

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