Apple, Up 50% This Year, Leads the Dow Higher

Technology

Published: October 14, 2019 6:40 am

Last Updated: January 30, 2020 2:41 pm

Apple Inc. (NASDAQ: AAPL) shares have risen an extraordinary 49.8% this year to $236.21. That is by far the best performance of any of the 30 components of the Dow Jones industrial average, which is up 15% to 26,816.59. The iPhone maker’s rise comes despite skepticism early this year about sales of its flagship product.

Apple’s stock increase has ridden the back of two developments. The new iPhone 11 has done better than expected, although the numbers are speculation by experts and not data provided by Apple. The other is that Apple’s bet on “services” as an alternative to rising hardware sales has gotten a boost based on the belief by some investors in particular that its AppleTV+ streaming product will do well.

The new product launches were indeed the tonic the stock needed. It had sold down sharply in mid-summer after Apple announced earnings. The mainstay of revenue continued to weaken as the iPhone X series did poorly, particularly in the world’s largest wireless market, China. The trade war better China and the United States also dragged on the stock, as anxiety about Apple supply chain interruptions grew. Apple sources many parts of the iPhone from companies in China.

Apple’s management argued that its Services business would replace the iPhone as the company’s growth engine. It was not an easy argument to make, at least at first. Services revenue in Apple’s most recently reported quarter was $11.5 billion, out of a companywide total of $53.8 billion. iPhone sales totaled $26 billion. Its next earnings report is due later this month, and it will show whether the trend management says it has bet on continues to improve.

The launch of Apple TV+ is critical to the new strategy. Apple already has a huge music store. Its app store is by far the largest in the industry. By some estimates, total apps downloaded since the store started total more than 130 billion. Many experts believe that app sales cannot continue to grow at rates they have over the past decade. Video streaming becomes an essential part of the growth in this multimedia business.

All this means that Apple’s bet on TV is absolutely critical. At $4.99 for the first month, after a seven-day free trial, it is aggressively priced compared to industry leaders Amazon and Netflix, which have price points of $12.99 a month. Apple’s management has gambled that, although its library of content is limited compared to the leaders, the low price, the Apple brand and the hundreds of millions of iPhones, iPads and Macs in the world are a huge base to which it can market its streaming service.

A significant number of investors have bought into Apple’s new iPhone 11 and services plan. Its market cap is back above $1 trillion. When it reports earnings in the coming weeks, the announcement likely will be the catalyst to keep Apple’s share growth rate well ahead of the Dow’s — or to drag it back down.