Apple (AAPL) shares initially moved up aggressively Tuesday after it announced updates to some of its products. But the gains were tempered as investors appeared to conclude that the tweaks are a mixed bag.
The stock rose as much as 2% Tuesday, before giving up those gains to trade lower late in the session. The NYSE FANG index was up all day. Tech stocks in general continued their outperformance of the broader market this week.
Apple’s hardware innovation curve has flattened over the past several years, but the stock’s resurgence, broadly speaking, has been mostly about services growth from the app store, new services like Apple TV streaming and the Apple Card. Apple’s gigantic installed base proves baseline support for the growth of services. The upcoming 5G smartphone cycle has boosted earnings expectations for the next few years and Apple is certainly positioned well to capture a lot of market share. The fast-growing wearables segment has also boosted the valuation.
But for the very near-term, improvements to items like the Apple Watch, which has caught on, are not necessarily the expected drivers of earnings or the stock.
Apple announced that its series 6 Apple Watch will feature minor improvements, inducing a blood oxygen monitor. This certainly improves the value the device can bring users, but isn’t likely a major driver of sales. Apple analysts have not focused much on improvements to the watch and some analysts mention the monetization potential of the Watch; it isn’t just about selling the watch, but continuing to sell more services on it. And that’s what Wall Street has its eye on when it comes to the new products. The company also announced a bundling package of some of its services, including AppleTV and iCloud storage.
“It seems like they [Apple investors] were a little bit [disappointed],” said Daniel Martins, TheStreet’s Apple Maven and Founder of DM Martins Research. There is “a little bit of sell the news. People are starting to cash in a little bit, maybe afraid of what could happen next. The second piece, which was a little surprising to me, some investors were expecting to hear something about the iPhone and you saw that in price action. As soon as [CEO] Tim Cook announced the event was going to be abut the iPad and Apple Watch, Apple stock took a dive of about 1%.”
Positively, Martins said he was pleased to see the health-focused monetization effort for the Apple Watch from management.
Tuesday, Apple was initially participating in a buy-the-dip-based rally in tech stocks. Between September 2 and September 7, the Nasdaq 100, home to some of the largest U.S. growth tech stocks, fell about 11%. At-home winners had previously experienced an incredible run-up as their secular growth drivers like cloud, streaming and e-commerce were seeing accelerated customer adoption. With that potentially comes a pull-forward of demand, which serves to neutralize valuations. This dynamic applies to Apple’s services business, which likely comprises a large chunk of the company’s market valuation -- and certainly a large chunk of analyst’s valuations. Aside from services, investors were more generally looking for secular growth trends that can power through economic headwinds, which are still very much a threat as the economy rebounds from the pandemic. Apple’s 5G story is a nice growth one for the next few years.
Now, investors have been picking up tech stocks at slightly cheaper valuations. Apple lead the rally, up 82% for the year into September 2,while the Nasdaq 100 was up 42% in that span. Apple sank 16% during the sell-off and while the index has recovered 3.3% since September 7, Apple has recovered just 2.7%. It’s possible Apple stock is beginning to be viewed as merely potentially a strong outperformer, rather than an explosive one. Earnings growth is expected at roughly 10% for the next several years and the multiple has expanded aggressively. Still, the 5G product cycle may have more legs to it beyond 2021 and some services like original content and streaming may improve on price and market share from here.
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