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Is Apple (AAPL) Stock Undervalued Based on Services, Non-iPhone Growth?

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Apple (AAPL - Free Report) stock has continued to fall after it slashed its holiday quarter sales guidance on the back of a slowdown in China and subdued iPhone sales. CEO Tim Cook has talked up the company’s non-iPhone divisions in an effort to restore investor confidence. Still, Apple’s services unit could be headed for a slowdown in Q4. But does this mean investors should run away from Apple stock?

Holiday Quarter Overview

Apple and Cook revised the company’s fiscal Q1 2019 revenue guidance to roughly $84 billion, down $5 billion from the low-end of its previous holiday quarter outlook that called for revenues between $89 billion and $93 billion. The new guidance marked the first time in over 15 years that Apple lowered its quarterly guidance. This sent shock waves through Wall Street and has investors looking to see if the likes of Starbucks (SBUX - Free Report) , Nike (NKE - Free Report) , and other giants with exposure in China will report lower-than-expected revenues.

The tech giant’s announcement also highlights how its high prices have held Apple back in markets where there are a ton of less-expensive smartphones available. Investors should also remember that Apple’s newer, higher-priced iPhones helped boost overall sales over the last year despite nearly flat unit growth. But the days of favorable year over year comparisons are set to end in Q4.

With that said, our current Zacks Consensus Estimate calls for Apple’s Q1 2019 revenues to sink 4.75% from the year-ago period to hit $84.1 billion. Plus, Apple’s full-year revenues are expected to sink 2.37% to $259.29 billion. Meanwhile, the company’s adjusted full-year revenues are only projected to pop 1.6% to $12.10 per share.


Services & Other Revenue Growth

Now that we have quickly covered what to expect from Apple’s holiday quarter, it’s time to dive a little deeper to see what to expect from Apple’s non-iPhone business.

It is important to know what to expect from services and Apple’s “other products” revenues, which includes Apple TV, Apple Watch, Beats products, and more, because Wall Street will need to look for new areas of growth similar to Microsoft’s (MSFT - Free Report) cloud computing expansion and maybe even Amazon’s (AMZN - Free Report) advertising growth as its top line slows.

At the moment, Apple’s services revenues are projected to reach $10.807 billion this quarter, based on our current NFM estimates. This would mark a roughly 27% surge from Q1 fiscal 2018’s $8.471 billion. Overall, investors would likely be pleased with that kind of growth from Apple’s services unit since the division climbed 18% in the year-ago quarter, 17% last quarter, and the 25.5% on average over the trailing six quarters.

We should note, however, that RBC Capital Markets analysts expect Apple’s services unit to climb just 18% in Q1 2019. With that said, Apple’s services business is somewhat cyclical and Apple Music is likely to continue to challenge Spotify (SPOT - Free Report) , while Apple Pay capitalizes on the growth of the fintech industry along with PayPal (PYPL - Free Report) , Square (SQ - Free Report) , and others. Furthermore, RBC expects Apple to roll out more services and thinks AAPL is still undervalued given its more than $126 billion in net cash.

Moving on, Apple’s less-talked-about other products unit is projected to soar roughly 44% from $5.489 billion in the year-ago quarter to hit $7.918 billion, based on our NFM estimates. This would blow away Q1 2018’s 36%, Q4’s 31%, and the trailing six quarters’ 33.5% average.

Investors should also note that this growth could highlight the success of the new, health-focused Apple Watch. “If you zoom out into the future, and you look back, and you ask the question, 'What was Apple's greatest contribution to mankind?' It will be about health,” Cook said in the recent CNBC interview.

Bottom Line

Apple reported just over $7 billion in total services revenue in 2010. That figure exploded to over $41 billion over the last calendar year. Meanwhile, Apple’s install base reached 1.3 billion a year ago and Cook said it added about 100 million to that total over the trailing 12 months.

Apple is also a dividend payer that is expected to launch a streaming TV service to help it challenge Netflix (NFLX - Free Report) , Amazon, Disney (DIS - Free Report) , and AT&T (T - Free Report) at some point within the next year. And let’s not forget that Apple has a history of inventing industry-changing products seemingly out of nowhere.

Apple is scheduled to release its Q1 fiscal 2019 financial results on Tuesday, January 29.

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