Apple (AAPL) reported strong second-quarter earnings on Wednesday, exceeding Wall Street's expectations. But the street is missing a “critical” piece of the puzzle, says one expert.
“If I look at the broader analysis across Wall Street today, I think that there is a critical missing piece specifically about what’s the proper multiple to put on this company,” Gene Munster, Loup Ventures managing partner, told Yahoo Finance’s On The Move Wednesday. “The key distinction here is that investors typically think of this as a hardware business. Understandable, given that 80% of its revenue is hardware. But keep in mind, 35% of earnings are services-based and over the next few years, the company is progressively going to start to sell a hardware as a service.”
Apple posted $58 billion in revenue for the quarter, despite iPhone sales being down. The company has been slowly moving away from its flagship devices — its hardware — and is instead focusing on its services, wearables and accessories. It also posted better-than-expected guidance for the third quarter, and is expected to ramp up content offerings as well.
The fact that the company is going “down this path” of becoming a services-based company requires a “rewriting of the multiple,” said Munster.
Because soon, “this 70%-plus kind of upside that we expect in the stock over the next couple of years, really assumes what we think is a consumer staple,” he said.
And that means Apple — in the near future — could become a “Coca Cola 22 times type of a multiple,” said Munster.
Apple will ‘work through’ softness in China
Munster, who has been a longtime FAANG observer, also talked about the iPhone maker’s woes in China, adding that the problems they were facing weren’t structural.
He previously said that Apple’s December dip when it saw weakness in China was not because of falling demand overall, but because of the increase in the average selling price of the iPhone.
“They are headwinds, no doubt, [but] I don’t think that they’re structural,” said Munster. “They will… work through those.”
But in the interview on Wednesday, Munster added that part of the reason why Apple’s China iPhone sales were “probably down 40%” then was also because of a “social campaign against Apple around the trade war.”
After the arrest of Chinese smartphone maker Huawei’s CFO in Canada last year, many Chinese businesses called for a boycott of Apple products, with many telling employees that they would receive subsidies if they buy Huawei phones, according to a report by Nikkei.
This affected first-quarter numbers, and “Tim Cook loosely alluded to that yesterday talking about the trade war, starting to soften as being a positive to their brand,” said Munster.
‘The clock has struck 12’ for Apple
But when it comes to Apple, Munster isn’t the only optimist in the room.
“With Cook and Cupertino facing hurricane-like headwinds in China, iPhone demand appears to have weathered the storm and is starting to "rise from the ashes" of the December debacle with a stronger growth trajectory now forecasted for the coming quarters and a healthy product cycle around the corner slated for September,” Wedbush analyst Dan Ives wrote in a note.
And there was much excitement over the new streaming service Apple announced earlier this year, Ives said in an interview on Yahoo Finance’s The Final Round.
“When it comes to M&A, I think the clock has struck 12," said Ives. “The company now is going to be laser-focused on more significant M&A in content, specifically looking at companies like a Sony Pictures, an A24, an MGM…”
And the efforts undertaken by Cook since the “dark days” in the beginning part of the year are the “the finishing touches on his legacy,” said Ives, adding that the chief has really put “Apple on the yellow brick road.”
Aarthi is a writer for Yahoo Finance. Follow her on Twitter @aarthiswami.
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