Any long-term investor will tell you that you need to have a solid thesis supporting your choice to buy a company's stock, and you have to stay on top of the new information that constantly pours in, in case it changes your thesis.
In the case of Apple (AAPL +0.79%), the reason you'd buy this company today is far from the reason you would have bought it 10 years ago, or 39 years ago when it first came public. In the past, you likely would have bought shares of this company for the innovation it was bringing to the space. Today, you may buy shares to own a slow-growing blue chip that will be steady for the long term. I'm not certain that investors recognize this.
For many years, Apple has been the gold standard of innovation. Apple products have been known to be efficient, carry a sleek design, and, most importantly, have few to no software issues. From the first home Mac computer through the iPod and eventually the iPhone, there is no doubt that the face of consumer electronics has changed for the better thanks to Apple.
In the last few years, however, the innovation that Apple is known for has seemed to slow and this is starting to become evident in not only its product line, but its financials as well.
Image source: Getty Images.
The last several earnings reports Apple has released prompted headlines about the explosive growth of its services revenue, which has indeed been noteworthy. These headlines might be overshadowing for some the details about slowing sales of the iPhone, which has been Apple's cash cow for many years.
For the three months ended June 29, Apple reported an 11.8% decline in iPhone revenue compared to the same period last year. That decline came despite the release of Apple's newest products -- the iPhone XS/XS Max and the iPhone XR, which were released in September and October 2018, respectively.
Apple's newer model phones are sporting fewer and fewer new features and coming out with more frequency. From 2007 to 2015, Apple released one phone a year, except in 2013, while in the last three years running it has released two phones per year, which now seems to be the standard.
Apple's more regular releases may be caused by consumers wanting to upgrade more frequently as sales of smartphones have moved toward people paying full retail price, without a contract, but with the option of trading in for the newest model once a certain percentage of the phone is paid off. This has created a loop for consumers of never owning a device outright and, you would think, would drive more sales for the iPhone. But this isn't the case. In my mind, this points toward Apple losing its innovative edge, and giving up market share to the Android platform.
While Apple's iPhone segment is struggling, there are some redeeming qualities in how the business is performing. For the same three-month period, Apple reported a 48% increase in sales in its wearables, Home, and accessories segment, along with a 12.6% increase in services sales when compared to last year.
These numbers are being propelled by the music, news, and TV services that are helping to make Apple a one-stop shop for everything entertainment-related. I respect the efforts it is making to grow the footprint in this space and I believe it is necessary given the big changes in how media is being consumed. Yet to be seen is Apple's newest product, the Apple credit card, which started rolling out to consumers this week. Only time will tell if this can provide a new, stable revenue stream for the company.
My only concern with the shift toward services is that Apple is losing its innovation edge on the competition. Moving toward basic products like a smartwatch, music streaming, and a credit card helps Apple keep pace with the market, but doesn't lead the market by bringing anything new to the table, as it is known for doing. Not to mention the fact that the market is already saturated with options like Spotify and Fitbit that, generally speaking, are cheaper and work just as well. Consumers like Apple products because they're the best, coolest, new thing, but I believe are seeing they are no longer meeting that expectation.
This is not to say that Apple is a bad investment. It's a large company, trading at a reasonable valuation, is buying back its own stock, and has a large chunk of cash sitting on the balance sheet, waiting to be put to work when the time is right. Make sure that your thesis for going long on Apple is centered around buying a stable company that will be an anchor for your portfolio, not buying a growth stock for the innovation it once had.
