If iPhone sales sag, 'Apple as a Service' might be future of company, says Gene Munster

Posted:
in AAPL Investors edited May 11
The way investors should treat Apple stock has changed, analyst Gene Munster insists, suggesting the company is now entering a "new paradigm" where Apple needs to be looked at more as a service provider than as the producer of iPhones and other hardware.

Apple iPhone X


"About every 10 years, there is a new paradigm that drives investor thinking on the Apple story," writes Loup Ventures analyst Gene Munster. Starting with the growth of Mac from 1984 to 1995, the reason to invest changed to "post jobs and competition from PC" until 1997, then the iPod era from 2001 until 2006, then lastly the iPhone from 2007 until present.

In his article, Munster suggests a new paradigm has been created, calling it "Apple as a Service." In this, Munster believes investors will shy away from the product cycle hype and "disappointment," and eventually stop needing the so-called iPhone "super cycle" for Apple to remain favorable to investors.

"What will slowly go away (may take a couple of years) in this new way of thinking is hype ahead of new product releases and the inevitable anxiety related to unit sales once a product ships," Munster writes. "We still think anticipation around new products will influence shares, but that influence will be shorter lived."

As an example, Munster proposes Apple will probably release a larger-screen and lower-priced iPhone this fall. While this would be good for iPhone demand, it is apparently unlikely to result in a super cycle, defined as a greater-than 10-percent year-on-year iPhone unit growth.

Munster outlines four key themes for Apple as a Service. First, he suggests a 0 to 5-percent growth in the iPhone business, which generates 62 percent of revenue, is "representative of a hardware business performing increasingly like a software business."

Apple's Services business, built on top of the predictable iPhone sales, is predicted to continue growing at a rate of around 15 percent for the next few years. In the most recent results, Services earned Apple $9.19 billion, the best quarter for the operating segment on record, and one that outperformed analyst expectations of $8.5 billion.

The third theme, capital return, suggests share buybacks could reach between $40 and $50 billion per year. "Assuming AAPL shares rise, that buyback alone could move shares 5 percent higher this year, 4 percent higher in 2019, 3 percent higher in 2020, etc."

The fourth and final area is in new products, with Apple still needing to innovate to maintain its high iPhone retention level at above 90 percent. Under the new paradigm, new product categories like "original content, AR (including glasses), and automotive autonomy are opportunities not yet reflected in Apple's valuation."

When combined together, Munster believes this creates a stable business that is growing at 5 to 10 percent per year, and one that is returning the majority of its profits to shareholders.

In the latest financial results, Apple revealed it earned $61.1 billion in revenue with an earnings-per-share of $2.73 in the second quarter of the fiscal year 2018. Shipments of iPhones were up 3 percent year-on-year to 52.2 million, collecting $38 billion in revenue, with an average selling price (ASP) of $728.30.
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Comments

  • Reply 1 of 24
    SpamSandwichSpamSandwich Posts: 29,902member
    I thought Munsterwas no longer covering Apple? Why is he talking and why is anyone paying attention?
    jasenj1cornchipwatto_cobra
  • Reply 2 of 24
    mavemufcmavemufc Posts: 326member
    The iPhone isn’t going anywhere anytime soon though, and while it remains it’ll still be one of the most popular smartphones out.
    ravnorodomwatto_cobra
  • Reply 3 of 24
    Mike WuertheleMike Wuerthele Posts: 3,321administrator
    I thought Munsterwas no longer covering Apple? Why is he talking and why is anyone paying attention?
    Nah -- he just jumped from one venue to another.
    cornchipwatto_cobra
  • Reply 4 of 24
    SpamSandwichSpamSandwich Posts: 29,902member
    I thought Munsterwas no longer covering Apple? Why is he talking and why is anyone paying attention?
    Nah -- he just jumped from one venue to another.
    Oh, lord.
    cornchip
  • Reply 5 of 24
    sflocalsflocal Posts: 4,245member
    Why give this glorified snake-oil salesman any podium time?
    lmasanticornchipwatto_cobra
  • Reply 6 of 24
    rogifan_newrogifan_new Posts: 3,237member
    Right now Apple’s so-called services business is dominated by Apple’s cut of the AppStore (which likely is mostly IAP from games) and iCloud storage. Apple should be focused on making the best products people want to buy not what products will change Wall Street’s narrative of the company. Take original content as an example; what problem is Apple attempting to solve here? Did they look out at the current landscape and say good programming is missing or is this just to appease Wall Street’s obsession with services and another way to extract more $$ out of existing customers? If Apple truly went all-in on Apple as a service then it might make more sense (and they could continue to add to it over time) but there’s no indication the company is planning to do that.
    canukstormcornchip
  • Reply 7 of 24
    Mike WuertheleMike Wuerthele Posts: 3,321administrator
    sflocal said:
    Why give this glorified snake-oil salesman any podium time?
    Because AI is for everybody. I get that not everybody wants investor stories -- but not everybody wants rumor stories, or tips, or reviews.

    If we didn't cover something because somebody didn't want to see it, there'd be nothing but a blank page.
    king editor the grateanantksundaramretrogustoravnorodomradarthekatcornchipjony0fastasleepmuthuk_vanalingam
  • Reply 8 of 24
    FolioFolio Posts: 382member
    Anything that changes Wall Street perception here is beneficial to not only stockholders but company recruitment, employee retention etc. That Apple is still lumped with HP is laughable.
    radarthekatwatto_cobra
  • Reply 9 of 24
    I pointed out several times that it wasn't just Steve Jobs that passed away but Apple the computer company died as well. Its a bitter pill to swallow but they no longer are about computers, computer accessories, and software. They are about consumer products and services. 

    In moving on though from computers I have to ask:

    Homekit is a great idea but where are the products and support? Apple healh, again, great idea but it needs better products, support, and ability to access this data past 1 phone.

    "Its 3rd partys fault." Apple use to control both sides of the coin, hardware and software, to ensure quality consumer expereince. They need to set up like Google has done with Nest and Home for their Homekit and Health App products.
  • Reply 10 of 24
    nunzynunzy Posts: 662member
    Munster is almost the worst Apple analyst of all time. He's yesterday's news.
    SpamSandwichlmasanti
  • Reply 11 of 24
    wood1208wood1208 Posts: 1,563member
    iPhone is so entrenched that new,current and non-iPhone users later converted will keep expanding it's echo system. So, services will also continue growing. There will not be such thing as people not going to need/use phones until learn telepathy. Apple is all good.
    watto_cobra
  • Reply 12 of 24
    anantksundaramanantksundaram Posts: 18,691member
    sflocal said:
    Why give this glorified snake-oil salesman any podium time?
    Because AI is for everybody. I get that not everybody wants investor stories -- but not everybody wants rumor stories, or tips, or reviews.

    If we didn't cover something because somebody didn't want to see it, there'd be nothing but a blank page.
    I am perfectly fine reading about Munster's (and other analysts') views. My self-esteem, or regard for Apple, or for its stock, is not affected in the least by what these folks say.

    It's always puzzling to me that some people give so much of a hoot.
    cornchipmuthuk_vanalingam
  • Reply 13 of 24
    lmasantilmasanti Posts: 57member
    Munster must have the crystal ball's clock like five years late!
    radarthekatcornchip
  • Reply 14 of 24
    hexclockhexclock Posts: 417member
    I pointed out several times that it wasn't just Steve Jobs that passed away but Apple the computer company died as well. Its a bitter pill to swallow but they no longer are about computers, computer accessories, and software. They are about consumer products and services. 

    In moving on though from computers I have to ask:

    Homekit is a great idea but where are the products and support? Apple healh, again, great idea but it needs better products, support, and ability to access this data past 1 phone.

    "Its 3rd partys fault." Apple use to control both sides of the coin, hardware and software, to ensure quality consumer expereince. They need to set up like Google has done with Nest and Home for their Homekit and Health App products.
    I pointed out several times that it wasn't just Steve Jobs that passed away but Apple the computer company died as well. Its a bitter pill to swallow but they no longer are about computers, computer accessories, and software. They are about consumer products and services. 

    In moving on though from computers I have to ask:

    Homekit is a great idea but where are the products and support? Apple healh, again, great idea but it needs better products, support, and ability to access this data past 1 phone.

    "Its 3rd partys fault." Apple use to control both sides of the coin, hardware and software, to ensure quality consumer expereince. They need to set up like Google has done with Nest and Home for their Homekit and Health App products.
    Your argument about HomeKit not withstanding, you need to revisit your Apple history. It was Steve Jobs himself who changed Apple to “Apple Inc.” 
    In addition, he hand picked his successors in Tim Cook and Ive, among others. Apple is rolling along pretty much as Jobs intended, in my estimation. 
    chasmfastasleepwatto_cobra
  • Reply 15 of 24
    chasmchasm Posts: 844member
    I think Munster's wrong about this, but in point of fact he was very accurate in his estimates for fiscal Q2 (he never succumbed to "iPhone X panic" like so many others), and his larger point -- that Apple's combined Services is a monster business with double-digit growth and room for expansion -- is very valid.

    As for the off-topic and irrelevant trolling re HomeKit, it is available in literally hundreds of products, and for anyone who cares about privacy and security in their smart products, Apple/HomeKit is pretty much the only choice (to be fair, nowhere near enough consumers think about this aspect, but I for one am very glad it's there).

    While Apple Inc isn't as limited as "Apple Computer" was, the inference that computers/technology aren't their main focus anymore is specious at best. Name a non-accessory Apple product that doesn't rely on technology, or a hardware product that doesn't incorporate a sort of computer. Go on ...
    edited May 11 watto_cobra
  • Reply 16 of 24
    badmonkbadmonk Posts: 718member
    Once again the Munster is sorta right, sorta wrong.  The iPhone 6 was such a large supercycle and those devices will be due to be replaced over the next few years.  Those owners are going to be loyal to the Apple ecosystem and will probably be buying the next crop of iPhones.  Yes people are going to be keeping their iPhones longer now that the product is more mature but there will
    be the halo effects of AirPods, AWs and other devices.

    So the reflection of the iPhone 6 supercycle will be more muted and spread out over three years.

    Second iPhones are relatively long-lived and often handed down within families and secondary sales so even if iPhone net sales go up 5% year over year the number of devices in circulation is becoming huge...hence the services play.
    radarthekatwatto_cobra
  • Reply 17 of 24
    canukstormcanukstorm Posts: 1,545member
    chasm said:
    I think Munster's wrong about this, but in point of fact he was very accurate in his estimates for fiscal Q2 (he never succumbed to "iPhone X panic" like so many others), and his larger point -- that Apple's combined Services is a monster business with double-digit growth and room for expansion -- is very valid.

    As for the off-topic and irrelevant trolling re HomeKit, it is available in literally hundreds of products, and for anyone who cares about privacy and security in their smart products, Apple/HomeKit is pretty much the only choice (to be fair, nowhere near enough consumers think about this aspect, but I for one am very glad it's there).

    While Apple Inc isn't as limited as "Apple Computer" was, the inference that computers/technology aren't their main focus anymore is specious at best. Name a non-accessory Apple product that doesn't rely on technology, or a hardware product that doesn't incorporate a sort of computer. Go on ...
    The size of HomeKit ecosystem pales in comparison to Amazon's Echo / Alexa ecosystem.  Apple had a 3 to 5 year head start with Siri & dropped the ball.  They had a 3-year head start with HomeKit & dropped the ball.

    https://www.bloomberg.com/news/articles/2018-05-09/amazon-sells-alexa-s-smart-home-technology-in-lennar-model-homes

    "Looking to sell its customers on the latest and greatest smart-home technology, builder Lennar Corp. flirted with Siri. Now it’s decided to go steady with Alexa."

    "
    The builder, which announced a partnership with Apple Inc. in 2016, has switched to Amazon because of its white-glove installation services, which customers would normally have to pay for, said David Kaiserman, president of Lennar Ventures. For its buyers, Lennar now includes a visit from Amazon technicians to set up devices and customize how they interact with the two Echo speakers included with the house, he said."
  • Reply 18 of 24
    jungmarkjungmark Posts: 6,548member
    I pointed out several times that it wasn't just Steve Jobs that passed away but Apple the computer company died as well. Its a bitter pill to swallow but they no longer are about computers, computer accessories, and software. They are about consumer products and services. 

    In moving on though from computers I have to ask:

    Homekit is a great idea but where are the products and support? Apple healh, again, great idea but it needs better products, support, and ability to access this data past 1 phone.

    "Its 3rd partys fault." Apple use to control both sides of the coin, hardware and software, to ensure quality consumer expereince. They need to set up like Google has done with Nest and Home for their Homekit and Health App products.
    Steve Jobs dropped Computer from the company's name. Jobs started selling iPod, iPhones, etc. They have been a consumer electronics company for a long before Jobs passed. 
    edited May 12 fastasleepwatto_cobra
  • Reply 19 of 24
    darkvaderdarkvader Posts: 323member
    Is it just me, or does this guy look like a cross between Grandpa Munster and Bashar al-Assad?
  • Reply 20 of 24
    5150iii5150iii Posts: 95member
    I’ve always viewed Gene as fairly bullish and optimistic on AAPL. I do remember he was one of the first analysts to put positive projections behind iPhone soon after it was launched FWIW. Since he left PJ he has been roughly doing the same media rounds with regard AAPL - that’s weird to me. He is in Venture Capital but still handles coverage of AAPL like an analyst. 
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