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How Apple Just Got Waved Back Into Club Trillion

By Motley Fool Staff – May 3, 2019 at 2:44PM

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Despite uninspiring iPhone sales, Wall Street is enthused by the stock again.

Even when you're the world's largest publicly traded company, your share price tends to move as much on emotion as it does on raw numbers. For Apple (AAPL 0.66%), the emotions among investors following its first-quarter earnings release Wednesday were positive ones, despite a decline in iPhone revenues. Partly, that optimism can be attributed to services revenue, which was up 16%. But that isn't the whole story.

In this segment of the Market Foolery podcast, host Chris Hill and senior analyst Aaron Bush explain the narrative and the corporate strategy that led to Wall Street's upbeat response to these tepid earnings.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 1, 2019.

Chris Hill: If you're keeping track of this sort of thing, Apple has rejoined Club Trillion. The market cap is up over $1 trillion now. iPhone revenue was down, but I guess we were expecting that? The services revenue, which is something that Apple has basically told us, "Keep an eye on the services revenue," it was up, what, 16%?

Aaron Bush: Yeah, not bad. I mean, it is what it is. It's actually not that great of a quarter. It was fine --

Hill: Wait! We'll get into the details in a second. Why do you think the stock is up? I had the same reaction as you. Like, this is good, there's some good in here. iPhone revenue is down pretty significantly. Why is this stock up?

Bush: It's important to understand exactly what Apple is right now. It's an iPhone company with a services narrative that creates the most value by giving all of its cash back to shareholders.

The iPhone sales were what they were, not great. A lot of that has to do with China not being as great as it used to be. It'll probably get better later in the year. Other things did well. iPad revenue was up 22%, wearables were up 50%, the services business was doing well. But I mean, part of the reason why the stock was up a decent amount is because they raised their dividend yet again, and they approved another $75 billion in share repurchases. They're just coming up with dozens of billions, out of nowhere, and just keep on buying back shares and giving it out. So Apple today is really an income play more than anything, which is fine. I'm personally looking forward to the next meaningful product wave, whatever that might be, so it starts getting exciting again. But this company is just printing cash, and they are creating value.

Hill: It's interesting that in Apple's history, for the size that the company is, they really haven't made many big acquisitions. Well, they haven't made many acquisitions, period -- yes, there are probably some small ones that people can trot out here and there, but when you think about the amount of cash they have on the balance sheet, they could buy just about anything they wanted to that could fit into the Services ecosystem or the product ecosystem. And they've just decided, "No, we're not going to do that."

Bush: Yeah, it's crazy! I honestly don't know if that's ever going to change. It's just part of who they are culturally. It's interesting to contrast them with someone like Alphabet, whose entire growth has been based on buying things like Android, YouTube, DoubleClick. So it's really impressive that Apple hasn't needed to. But, part of me wishes that they would step up big in some way. They probably will. Apple is pretty good at biding their time, waiting for the right moment when they come out the biggest and best. It could be augmented reality within a year or two, for all we know. And suddenly, the entire tech landscape has changed again, and Apple's leading the way. But for now, it's really just about, let's just sell more iPhones, let's sell more services, and let's make as many billions as we can and give it all back.

Hill: Just to drill down on the Services for a second. As you said, it was up 16%. That was the part of the quarter I was the most curious about. How are they going to do, what kind of growth are we going to see? I looked at the 16%, and I just thought, OK. That's not really knocking the cover off the ball. It had been north of 30%, I would have been particularly intrigued by that.

Now, having said that, if this is something they can sustain; if for the next three to five quarters, they can continue to put up with this type of growth, then it starts to become meaningful. A year ago, when they really started to talk about, "We're really going to invest in services," it was significantly smaller. You would be forgiven for laughing out loud, like, "Come on, it's such a tiny part of your business." Now, in terms of straight revenue, it's the second-largest part of the business after the iPhone. It's a distant second, but it's well ahead of what they're doing in terms of iPad sales or Mac sales or wearables.

Bush: Yeah. I think it's important to put it in context. It's second to iPhones, but if it was a stand-alone business, it also would be one of the largest businesses in the world. I actually do think that that 16% growth, they can keep that up, not just for the next couple of quarters, but for the next few years, probably, if they do a good job. I know in the past, I've talked about how their services business, particularly their App Store practices, they'll potentially be the subject of antitrust regulation. That still could happen. I do think that something probably needs to change. But their strategy is sound. All of the categories that matter most -- news, games, payments -- they're finding ways to not only provide that basic-level platform but get in on bundling all of those different things into something where they can make even more money and put even more pressure on other companies. Their strategy is right, they're doing a good job. But when you're a trillion-dollar company, it's tough to move the needle.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Aaron Bush owns shares of Alphabet (C shares) and Apple. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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