Panicking investors are missing a crucial Apple metric


Cook says that Apple is no tax dodger.
Photo: Ste Smith/Cult of Mac

Apple soothsayers have been predicting doom and gloom for the iPhone-maker ever since Tim Cook dropped the company’s Q1 2016 earnings. iPhone sales are projected to decline. The iPad is still struggling. And even the Mac is taking a drop.

This is the end for Apple according to some Wall Street crazies, but they’re missing a key metric in Apple’s earnings report that shows the company still has a lot of growing to do thanks to it’s huge install base.

Apple’s slide deck includes a metric called ‘service revenue’, which as described by investment guru Jim Cramer, is a great way to explain and monetize the value of Apple’s ever growing install base, that now totals over 1 billion active devices.

“Installed base revenues — the ones we all pay for iTunes, music, the app store licensing, service parts, iCloud and Apple Pay — are growing at an incredible 23% year over year, from $25 billion in fiscal 2014 to $31.2 billion in fiscal 2015,” Cramer told The Street. “That’s the number that we need to key on, not unit devices.”

That number should continue to grow as Apple’s install base (actives devices) grows. Even if iPhone sales decline the next few quarter, Apple will continue to rake in the money thanks to the walled garden of services the company has carefully curated since the iPhone’s inception.

Wall Street was disappointed with Apple’s minuscule 1% growth in iPhone sales year-over-year, but they’re simply not looking at the bigger picture. Apple shares dropped from around $101.42 per share on Monday morning to a weekly low of $92.80 yesterday.

  • Lynn

    The author states: “iPhone sales are declining.” No. They have not declined. The rate of growth has declined. There is a difference.

  • AAPL.To.Break.$130.Soon>:-)

    I’m certain it has less to do with panic and more to do with greed. The big investors don’t have patience to wait for a lumbering giant like Apple to increase revenue in the double-digit range. It makes more sense to put money into a stock like Facebook or Netflix where fortunes can practically be made overnight. Big investors aren’t loyal to any company. They go where the fast money is made.

    Apple is a valuable company but the stock is practically worthless in terms of share gains. Exactly who is stupid enough to willingly put money into a company and then have to wait a year to see any share gains. Apple is a horrible short-term investment. The company is making money like crazy and then they’re not even giving back an overly large dividend compared to what they make. There just doesn’t seem any reason for big investors to waste their money on Apple stock.

    Carl Icahn was foolish to put so much money into Apple as he hasn’t seen any share gains since early last year. Of course he has plenty of money in other companies so he really isn’t being hurt. It’s only the small investor who put their hard-earned cash into Apple and have gotten almost nothing in return. Apple doesn’t have a clue how to put value into the stock and will likely lose its market cap crown to Alphabet, a company that can excite investors and make them believe it’s a far better company than Apple as an investment.

  • Nick Sharratt

    This was the key story I took from the announcement and I’ve been amazed that so few analysts and commentators seem to have recognised it. It’s been clear to me for some time that Apple is rapidly looking to focus on service growth, with the Apple TV, Apple Music, and most critically for me, the announcement last year of the new iPhone lease scheme. That latter is exactly the sort of “everything as a service”, even hardware, that is expected to be the future of IT. But the number that brought home to me the scale of growth Apple can leverage was the billion ACTIVE devices. That level of engaged, service hungry consumers is an amazing asset which will be huge for future growth.

    • itfa

      Those active devices have been “leveraged” already and the companies growth is still slowing. Yes, it is an excellent performing company, but as an investment it doesn’t look all that great to me. Last I checked, they are paying a dividend of 1.8%, and it has lost over 25% of its value over the last year. Not exactly the environment I want my retirement sitting in, especially when I can just dump my money in property and get an 8-10% annual return like clockwork.

      • Nick Sharratt

        Sorry, I wasn’t clear. There’s a difference between if Apple’s growth can continue by increasing profit from services (even if iPhone growth stalls because the smartphone market has approached saturation) and if it makes a good investment.

        The investment decision rightly as you say depends on risk and return and while the market has decided against Apple as a safe bet, it will remain a bad choice – but that’s the problem with the market, it has no real connection to the reality of a companies performance and everything to do with mass hysteria. Apple is a bad investment because people think it’s a bad investment, the same as it was previously a good investment because everyone was ‘cashing in’ on everyone thinking it was a good investment.

        My point was that analysts who are supposedly advising on the likely future earnings growth missing this important shift in focus to services and the potential for continued growth that brings are not doing their analysis well.

        I don’t bet on the market myself – except through my pension scheme on my behalf. I find the whole system flawed and immoral, but that’s just me.

  • It’s about setting expectations. Apple has been pitched as the can-do company for growth in sales. If they want to be valued as the high services company, that takes investors and analysts to accept that pitch and value the company on that plank. Microsoft did the switch from Windows revenue to cloud revenue, took a short term stock price hit then started to climb back up when the cloud delivered.