For Apple (AAPL) , is the iPhone still the center of the universe?
That's the question on the minds of many investors, with Apple falling slightly short in iPhone unit sales amid an overall robust June earnings report.
Apple beat expectations nearly across the board, reporting $53.3 billion in revenue, and a 20% increase in iPhone revenue for the quarter -- but analysts pressed Apple Tim Cook for more detail on Apple's plans for life beyond the iPhone, which makes up more than 60% of Apple's total revenue. Shares rose almost 6% on Wednesday to a new all-time closing high of $201.50, leaving the the tech giant just shy of the historic trillion-dollar market cap.
On the company's earnings call with analysts on Tuesday afternoon, Needham analyst Laura Martin asked Tim Cook how the company thinks about its latest offerings such as the Apple Watch, AirPods and Apple Music subscriptions.
"I love the expansion of new products. Do they attract people to the ecosystem or does the person have to have an iPhone first?" Martin asked.
Driven in recent years by the iPhone, Apple's 'walled garden' ecosystem -- its closed world of devices, software, apps and content curated entirely by Apple -- has been very successful in enticing users and keeping them in the fold. But in a world populated by home assistants, wearables and other connected devices, in addition to phones, investors are debating how the users of the future will wind up there.
Cook responded on the call that non-iPhone devices and products are a "core part of the ecosystem," as seen in increasing revenue in Apple's wearables business. Meanwhile, Apple is touting growth in its services category -- which includes the App Store, iTunes, iCloud and Apple Care -- which bullish analysts cite as evidence that Apple is on the right track. Apple reported that its services revenue increased 31% to $9.5 billion this quarter.
In an interview with TheStreet on Thursday, Martin explained how she interpreted Cook's response to her question.
"The answer led me to believe that even if you're drawn to the ecosystem through the Watch [or other products], you'll quickly integrate back into the phone, because the phone makes everything work," Martin said.
Needham raised its price target to $220 from $210 on Wednesday largely on the idea that a more diversified slate of Apple products means more entry points into Apple's lucrative ecosystem. The firm estimates that Apple's ecosystem now includes 823 million unique users, with 90% of those users owning an iPhone and iOS users staying in the ecosystem for 10 years on average.
"The gaping hole in their strategy right now is connected home; they need to get HomePod right or buy something else," said Tom Forte of DA Davidson. "But what gives me encouragement there is that they poached someone from Google to improve Siri, and with a new iOS and the privacy features, they did make Siri incrementally better." Forte was referring to Apple hiring former Google AI chief John Giannandrea to lead its voice-assistant technology, following criticism of Siri's progress relative to Amazon's Alexa.
Added Martin, "There's a war going on between Microsoft (MSFT) , Amazon and Google in the home, while Apple is sort of dabbling. Their product roadmap has had TV on it; now it's had the HomePod for six months. We'll know how important it is to them by looking at their roadmap over the next two years."