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There is an astounding aspect to Apple that many investors haven’t focused on.
Apple Inc. added 100 million subscribers to its software-and-services segment over a one-year period. Compare this with that much celebrated number from Amazon It took Amazon 13 years to reach 100 million Prime customers. Apple previously needed many years to amass 170 million subscribers.
Services will likely be the growth engine for Apple, unless the Cupertino, Calif.-based company comes up with a new product line. That is a much bigger positive for Apple’s stock than it seems on the surface.
Let’s explore this issue, starting with a chart.
Chart
Please click here for an annotated chart of Apple. Please note the following from the chart:
• The chart shows that the price of Apple’s stock has been bound by two lines. The upper line provides the second resistance that needs to be broken for the stock to move higher.
• The chart shows a horizontal line above the current price that offers the first resistance and needs to be broken.
• The chart shows that over recent years, volume in Apple’s stock is low. This indicates that Apple is an over-owned stock. Over-ownership makes a breakout difficult because almost anyone who wants to own Apple already owns it.
• The Arora Report continues to hold a core position in Apple stock originally bought at $18.73. We have doubled the returns for our subscribers by trading around the core position with well-timed entries and exits over the years. This record is publicly well-documented.
• The relative strength index (RSI) shows that there is a lot of room to run, but the stock has not yet picked up the momentum needed to break out.
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Long-held prediction
Apple has traditionally garnered a relatively lower price-to-earnings (P/E) ratio because of its heavy dependence on the iPhone. The Arora Report has long predicted that Apple will start getting a higher P/E when its service revenues reach 20% of total revenues. That call seems to be coming true — the company is at 15%. Apple has many levers to accelerate service growth. The Arora Report’s call is that Apple will reach that 20% target over the next two to three years.
Unless Apple comes up with an entirely new product line, service revenues and buybacks will likely sustain the present valuation. If service revenues further accelerate and smartphone sales don’t slow, Apple’s stock may stage a breakout.
Relief rally
Stocks move based on actual earnings and projections reported compared to the whisper numbers. Whisper numbers are often different from analysts’ published numbers. Some believe that analysts provide whisper numbers to their best clients as a tool to generate business.
For Apple’s stock, whisper numbers were lower than the consensus numbers. The reason is that earnings and guidance from suppliers in the mobile supply chain were lower than expected. For example, Taiwan Semiconductor issued weak guidance. Teradyne which produces test equipment, also issued lower guidance due to weakness in mobile.
Apple beat the whisper numbers, and the stock has rallied. Still, the rally in Apple’s stock on earnings should be considered a relief rally, not a sustainable one.
What to do now
The Arora Report’s call is to continue to hold a core position in Apple and trade around the core position to add extra returns. Those not holding Apple may consider buying it on a dip into the buy zone.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.