by Lei Xuan
Two years ago Apple Inc. released iPhone 5, the company’s first smartphone product to roll out after the death of former CEO and co-founder Steve Jobs. Investors were not that impressed: Over the following seven months, Apple’s stock price tumbled more than 44 percent. Wall Street wanted hot products to give the company its former momentum.
But after that fall from grace, Apple shares have mounted a remarkable comeback. These days, as Apple unveils its latest smartphones, it is entirely a different story this year.
Since the release of iPhone 6 and iPhone 6 Plus in the U.S. on September 19, shares of the Cupertino, California-based company have risen more than 14 percent to a new all-time high — twice the Standard & Poor’s 500 index’s 7 percent growth over the same period.
The stock’s strong performance reflects strong iPhone sales, surprising strength in demand for Mac computers and Apple’s increased guidance for the current fiscal quarter ending in December.
On a more fundamental level, Apple shares are surging once again because once-fearful investors have decided that the passing of Steve Jobs doesn’t mean the end of innovation at the company.
Those dynamics were visible in the quarter ended September 27, when the technology giant had revenue of $42.1 billion, or $1.42 per diluted share, well ahead of consensus estimates at $39.85 billion, or $1.31 per share. The company expects revenue between $63.5 billion and $66.5 billion in the current quarter, exceeding estimates of $63.52 billion.
“With amazing innovations in our new iPhones, iPads and Macs, as well as iOS 8 and OS X Yosemite, we are heading into the holidays with Apple’s strongest product lineup ever,” CEO Tim Cook said confidently at the conference call held on October 20.
Apple is expected to benefit from the shopping season and full-quarter sales of iPhone 6 and iPhone 6 Plus in the current quarter.
“iPhone momentum in enterprise market remains very strong,” said Chief Financial Officer Luca Maestri during the company’s conference call. She said the latest data published by International Data Corporation showed that iPhone has 69 percent share of the U.S. commercial smartphone market.
To Apple, iPhone is no doubt the biggest moneymaking machine. In 2014, iPhone sales contributed 56 percent of Apple’s net income.
But analysts aren’t quite as optimistic about other Apple products, especially iPad. The tablet sales have been shrinking for three consecutive quarters.
Tim Cook defended iPad during the conference call. He said the declining iPad sales were “not a huge issue.” “And because we’ve only been in this business four years,” he added, “we don’t really know what the upgrade cycle will be for people.”
“iPad’s growth is slower than what we anticipated,” said Morningstar analyst Brian Colello, “It faces two problems. The first is customers are moving to large-screen smartphones, so they see less in need of buying smaller tablets. And the other one is they are holding onto their tablets for a long period of time.”
Nevertheless, analysts don’t think iPad will be a drag to Apple, because iPad only contributed 17 percent of the company’s net income.
“My expectation is that iPad will keep declining for a couple of years,” said Raymond James analyst Tavis McCourt. “It is not meaningful to the financials. They make a lot more money on iPhone than they do on iPad. The smartphone is the biggest consumer product category in the world. So if you are successful in it, it will always dominate your revenue stream.”
Analysts hold a similar view on Apple Watch, the company’s first generation of smartwatch that will be released early in 2015.
“The small watches are less important technology products than phones,” said Colello.
The company will classify Apple Watch in the “other products” category in its financial results along with Apple accessories and the slipping iPod business.
But to analysts, the key point to Apple’s outlook is not creating a new successful product like iPhone, but maintaining its customer loyalty.
“The only pressure and one that will continue for quite some time is Apple plays behind the market and sells premium products and continuously has to build software and services that justify that premium,” Colello said, “otherwise costumers will go to lower price devices.”
Apple Pay, the company’s newly launched mobile payment service available with iPhone 6 and iPhone 6 Plus, will play a role in maintaining loyalty and premium pricing.
“We don’t think Apply Pay independently will generate tens of billions of dollars,” Colello continued. “But what we do think is it will keep customers’ loyalty in the ecosystem that will improve users’ experience and it will allow Apple to continue to sell iPhones at premium prices.”
Analysts remain optimistic about Apple’s future. Over the past month, 35 out of 49 analysts listed by Bloomberg maintained a “buy” rating or “outperform” rating on Apple.
With a market capitalization of $674.7 billion, Apple is the world’s most valuable company, and it keeps on breaking its own record. Some investors speculate that Apple could soon become the first $1 trillion company, which means the company’s shares are expected to reach $170.50.
Yoko Yamada of Daiwa Capital Markets America is the only analyst in the U.S. to downgrade Apple’s stock price outlook from “outperform” to “neutral.”
“I think Apple’s stock price is neither too high nor too low. That’s why my rating is neutral,” Yamada said. “The stock price now is very reasonable. The future or it depends on how S&P 500 index goes.”
She said the profit margin of Apple at 38.6 percent was still high, but the next generation of iPhone probably wouldn’t perform as well as iPhone 6 and iPhone 6 Plus.
“Not only Apple, but many hardware makers have the same issue. The growth rate of Apple will be decreasing, especially hardware. I think Apple should focus on some software business, like Apple Pay or iTune Store.”
Less than a week after Yamada’s downgrade, Apple’s stock price marched on and passed her target price of $114, closing on the Nasdaq Tuesday at $115.47. Apple shares then took a breather, trading at $114.91 Wednesday afternoon.