Apple’s Earnings Renewed Hope, But There’s A Huge Task Ahead

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After losing close to 30 percent of its value since reaching a record high in October, Apple (NASDAQ:AAPL) shares have staged a strong rebound on its fiscal 2019 first-quarter earnings report late January.

After seeing gains of about 10 percent since it reported results, Apple bulls have found a renewed hope in this tech titan, which has been one of the most beaten-down tech stocks of the past three months.

Apple’s Earnings Renewed Hope, But There’s A Huge Task Ahead

Apple (AAPL) – 1-Month Chart

Investors were encouraged to see that the company has strong momentum in the other parts of the business that are positioned to compensate for falling iPhone sales, which still account for about 60% of total sales.

While iPhones sales fell 15 percent in the quarter ended Dec. 31, sales from iPads jumped 17 percent, wearables and related accessories rose 33 percent and Apple’s services business grew 19 percent year over year. Combined sales from these segments hit a record high in the quarter.

Life Beyond IPhones

The predicament Apple is in is clear. It has to diversify its revenue base fast enough to keep its growth engine running when its bread-and-butter business is slowing.

That challenge is undoubtedly big, but not too hard for the company to overcome. Apple has one of the biggest cash hoards in the corporate world and a history of surprising its customers with innovation.

The first-quarter earnings gave us some indications that the company is already on its way. Spending on research and development, for example, hit a record of $3.9 billion in the quarter, up 15 percent year over year. The company projected that operating expenses will jump nearly 14 percent year over year in the March quarter.

To prepare for life beyond iPhones, Apple has many product offerings in the pipeline that have the potential to reverse the decline in overall revenue. While speaking on CNBC last month, Apple CEO Tim Cook said the company will announce “material” new additions to its growing roster of services in 2019.

The new services will be ones that Apple has “been working on for multiple years,” Cook said. Apple has been investing in health and wellness recently as it capitalized on the success of the Apple Watch and hired dozens of doctors to bolster its health technology segment.

“I believe, if you zoom out into the future, and you look back, and you ask the question, ‘What was Apple’s greatest contribution to mankind?’ it will be about health,” Cook added.

The other possible launch in 2019 is its Media Bundle, which could include video streaming, Apple Music and the Texture news app. These additions will certainly bolster the appeal of Apple’s family of hardware and could help revive sales of iPhones.

The other game-changing weapon that Apple has so far not tested is a low-priced iPhone developed for low-income countries such as India. That product will certainly end Apple’s one-size-fits-all-markets approach, but could unlock massive potential and penetrate markets where Apple needs to resonate well with local customers.

We won’t be surprised if such a product is already in the pipeline to capture the market share in India, for example, where Apple has hardly 1% of the smartphone market.

Bottom Line

It’s difficult to predict whether Apple shares will be able to sustain their current gains, given the highly volatile macro environment and investors’ increasing unease about high-growth stocks. But if you’re a long-term investor, it’s important to remember that Apple has both financial and technological superiority to overcome its iPhone challenge. If you invest in this great company with that mindset, the daily market noise shouldn’t shake you.

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