Subscribers who have been following the trades of the Action Alerts PLUS charitable trust know the story: Apple (AAPL) is to be bought, held and not traded. But the broader market has not heeded that advice, sending Apple shares tumbling after the ubiquitous tech company's fourth-quarter earnings results failed to impress. So the question is, what are the traders missing?
With Apple, investors have to take the good with the bad in the short-term, according to the Action Alerts PLUS team.
"We reiterate our view that Apple is a stock to own, not trade, and we believe the strong investment thesis is validated in this quarter," AAP co-managers Jim Cramer and Jack Mohr wrote in a note this week.
Here's the bad. Apple currently relies so much on its high-margin iPhone sales -- iPhone sales accounted for 60% of Apple's overall revenue in the quarter -- that the global saturation of the smartphone market could hit the company hard. That downturn led the company to report its third consecutive quarter of declining revenue and profits.
The company was still able to top analysts' bottom-line expectations, though a 9% decline in revenue caused Apple to miss top-line estimates. But investors really punished Apple for its future guidance. Apple expects first-quarter 2017 gross margins to fall to somewhere between 38% and 38.5% vs. Wall Street's expectations of 39%.
But there's also the good -- and the reason why Apple's stock is worth holding onto. The company's services sector, the Apple ecosystem, is a juggernaut in waiting.
"Longer term, we see tremendous value in the Apple ecosystem and its ability to monetize its user base," Oppenheimer analyst Andrew Uerkwitz wrote in a note this week. "Apple's substantial capital-return program should provide downside protection, making this a Perform-rated stock."
The services segment is diverse, and replete with countless opportunities waiting to be exploited by the company. Good thing Apple has all of that capital laying around. One hand washes the other for Apple, and investments into Apple's ecosystem will yield dividends in its smartphone business.
"We believe this validates the company's strategic intent to diversify through profitable avenues of growth -- content being a key area where the company has the potential to disrupt, while preserving and potentially emboldening current iPhone loyalty," Cramer and Mohr wrote in a recent note.
Services revenue grew 5% in the fourth quarter sequentially, and 22% year over year, but there are still question marks tied to the segment. For example, Apple's music streaming service, Apple Music, has still only been adopted by less than 5% of iPhone users. But Apple Music is just scratching the surface of what Apple's ecosystem has to offer.
"On the conference call, [Apple CEO Tim] Cook pointed to Apple Pay's burgeoning global growth (highlighting a 500% uptick in transaction volumes year over year), a revitalized streaming music business (up 22% courtesy of Apple Music) and sustained momentum and engagement seen across its App Store ecosystem," Cramer and Mohr wrote this week.
Outside of services, Apple has three major catalysts ahead of it, according to FBN Securities analyst Shebly Seyrafi. In the coming quarters, Apple should benefit immensely from the struggles of its arch-nemesis Samsung, particularly with the Galaxy Note 7. Apple will beef up its hardware offerings with new Mac PCs soon, which could take some pressure off of its smartphone segment. And finally, Seyrafi expects Apple to increase the availability of the iPhone 7 and 7S.
Apple has always been a forward-looking company, so while the reliance on smartphone sales has turned into a double-edged sword for the company, Apple still has some tricks up its sleeve. Services will be a major growth driver for Apple going forward, making the current hiccups the company is experiencing now somewhat more bearable.