Here’s why Apple stock is setting records even as the iPhone slows down
Apple’s stock has been on a roll this year, breaking all-time high after all-time high. Though iPhone sales growth, which is Apple’s biggest profit engine, isn’t what it used to be, the company has solidified its place as the world’s most valuable publicly traded company.
Apple got an additional boost when an SEC filing this week revealed that Warren Buffett’s firm Berkshire Hathaway increased its stake in Apple late last year, making it now worth about $7.8 billion. While Berkshire Hathaway hasn’t yet commented on why it made the bet, there are a couple of big reasons to buy Apple on a high.
Wall Street seems to think that President Donald Trump will follow through on his promise to allow U.S. companies to bring money held offshore back to the States tax-free. This would allow global tech companies like Apple, which hold a disproportionate amount of their cash abroad, to duck billions of dollars in U.S. taxes they otherwise would have owed.
The second big reason is a shift in Apple’s core business. Since it introduced the iPhone a decade ago, Apple’s stock value has multiplied several times over. The iPhone remains a revenue firehose, having generated more than $54 billion (a new record) last quarter. But iPhone sales aren’t growing as quickly as they used to, and Apple is now growing the amount of revenue it sees from services sold through the phone and other devices — things like Apple Music, the App Store, and iCloud subscriptions — at a rate that makes Wall Street pretty happy.
Services brought in $7.2 billion in revenue last quarter, marking an 18 percent year-on-year improvement. This is several times the size of Netflix’s entire streaming business, and Apple CEO Tim Cook says he wants to double it by 2020.
Investors hope he will. Apple is the most heavily weighted stock in the S&P 500 index, so it exerts the biggest gravitational pull on the most widely used stock market benchmark. About $8 trillion in assets are benchmarked to the S&P 500 worldwide, so when good things happen to Apple, it tends to enrich a broad group of investors all over the world.
If, however, Cook doesn’t succeed in building Apple services into a revenue behemoth, it could have a severe negative impact on the retirement accounts of many Americans, most of whom probably hold some amount of Apple stock in their portfolios. And although investors may now believe otherwise, the challenges that Cook and Apple face in building a fast-growing services building are significant.
Google, Microsoft, and Amazon are all making big plays in similar services businesses, and they are all attempting to back them up with new anchor products like the Google Home and Amazon Echo. Although Apple executives have been talking up augmented reality and original, exclusive TV programming, those are both areas in which competitors like Microsoft and Amazon are already further ahead.
“I’d be excited if Apple announced an Echo competitor — hell, if Siri actually worked! But Apple launching TV shows is like Goldman Sachs making a new social media app,” media analyst Bob Lefsetz wrote in his email newsletter earlier this week. “But this is the company that’s gonna triumph in the future, by executing a formula that others have perfected. I don’t buy it. And neither should you.”