Reducing IPhone Dependency Is a Tailwind for Apple

Apple’s (AAPL) second quarter of this year was the most disappointing quarter, as the company's revenue dropped 12.8 percent to $50.6 billion year over year. Moreover, the company reported EPS of $1.90, $0.10 less than the estimates. This was the first quarter in which the company’s iPhone sales declined substantially. Along with inadequate results, the company shared weak guidance for third quarter 2016.

However, Apple shocked everyone by posting better than expected third quarter results. The company reported revenue of $42.4 billion, $310 million better than the estimates, whereas EPS came in at $1.42, $0.04 greater than the estimates.
Despite delivering strong results, the company’s sales declined 14.5% year over year, which was expected.

Apple’s international sales accounted for 63% of overall revenue, but the most significant thing to notice here is that the company’s services business only surged 19 percent year over year. Keeping in mind the company’s successively declining sales; it seems that the company’s iPhone sales have peaked. Therefore, it has become necessary for the company to focus on its services business.

Services need special attention by the company because it permits a very high RoIC model. Third party developers can sell services via Apple’s ecosystem. This is a plus point as every surplus sale needs virtually no incremental investment from the company. Moreover, services do not suffer directly from the short product phases that lurk the company’s electronic devices.

Apart from this, services can escalate customer detention and reinforce market share for the Apple’s electronic devices that shields them to some extent from viable threats.

A rivalry with Samsung

Samsung is one of the chief rivals of Apple in the high-end smartphone market. Samsung’s latest flagship phones, Galaxy S7/S7 Edge, outperformed the smartphone market and are witnessing strong momentum. Currently, Apple is facing a tough competition from Samsung, and is on its way to release its new iPhone 7. It is highly likely that the upcoming iPhone will not comprise major design changes. Therefore, is has become mandatory for the company to aggressively focus on its services business, which it is doing pretty nicely.

Conclusion

With the smartphone market saturating, it is important for Apple to look at other products to propel its growth. While it looks like Samsung may have taken the lead over Apple by launching the S7 which is witnessing double-digit growth in a flat smartphone market, Apple’s other business, especially service segment, should offset much of that loss.

Given that Apple is working actively to diversify its revenue, I think the stock is a great buy for investors with an investing horizon of five years.
Published on Aug 4, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

Posted in ...