Maybe it's because no one thought it could happen? Maybe it's because no one who covers the stock takes it seriously? Or maybe, just maybe, it's the packaging -- and you need someone like me, someone who lives and breathes why a stock goes up or down a couple of bucks, to point it out and drive it home.
If you can't guess by now, you haven't been following the transformation of Apple (AAPL) from being the company always putting brilliant and elegant technology into the hands of hundreds of millions of people on this planet to a company that now gives you a service stream that will soon be worth much more than the technology itself.
That's obvious from the numbers last night, where we learned that there are 1.4 billion Apple devices that are producing 390 million paid subscriptions. That is an increase of 120 million versus a year ago -- and it will soon be 500 million.
But what's not obvious -- just as when Apple unveiled the service revenue stream that produced incredibly high-margined $11.5 billion in sales and grew at 16% -- is that the 390 million subscription figure will, within two years, define how we look at Apple..
I know that seems strange to think that a company worth about $1 trillion can actually be redefined in a more positive way, but I think that's precisely what's going to happen.
To understand this concept, back up a few years ago when Apple first started breaking out the service stream. It was pretty much an afterthought in the presentation, because it is so darned pedestrian -- fees for iCloud back up, app store software, service contracts and the like.
I often think they broke it out because of hectoring by guys like me who said "come on, we pay this bill every month and so does everyone else and we don't think about it and the gross margins are amazing so let's focus on it." But Apple is a company steeped in invention and Tim Cook is the keeper of the tradition. Services aren't as breathtaking as product, never will be.
The analysts who follow the stock are similarly inclined to grade the company by one number, handsets, and that further pigeon-holed the process of revaluation. It had been a vicious cycle downward that had threatened to overshadow the incredible wearables growth as well as the service stream that I care much more about than the hardware itself.
Oddly, while it was initially seen as nefarious, especially after a brutal preannouncement, the decision to stop giving handset numbers was nothing short of brilliant, because it shines a light in the way this company will be valued in 2020. Apple will become a subscription company with a terrific lifetime customer value given its 99% consumer satisfaction and its newly devised trade-in and financing packages that keep the customer within the orbit to keep spending on all of the new services that can be subscribed to.
Now, back to the stock jock in me. You must never look at how a company is being valued now, if there is a new way to perceive that price-to-earnings multiple. I want to pay 6x the earnings of a hardware and services company -- the current multiple of Apple, which is five turns higher than before we thought about service revenue. Remember, if it weren't for services and wearables, we would be looking at Apple only slightly better than the way we look at HP Inc (HPQ) , which sells at 9x earnings.
Next stop though, is to look at Apple through the lens of a subscription economy which, I think, will allow you to put a 20x multiple -- stickier, more consistent, more like a consumer packaged goods company with tremendous loyalty -- on the out-years.
What do you get if you use a subscription economy multiple on Apple's stock? How about $270.
Why isn't it there now?
First, it is happening too fast for most of these analysts to cover. Second, I think the thesis I am propounding has taken the company somewhat by surprise -- remember its heritage. Finally, it takes people like me to talk about it, because Apple, correctly to some degree, regards this kind of spin, so to speak, as pandering.
I don't care. My view is own it, don't trade it. With this quarter, we got another whole reason to own -- Apple's ascendance as a premier subscription economy company. And it's the best way yet to value this incredible American icon that's run by an incomparable and yet still underrated CEO, Tim Cook.