Apple (AAPL) CEO Tim Cook best get a good night's sleep on March 24 followed by a heart-pumping workout the next morning.
Because on March 25 when the titan of tech strides up to the stage in front of a globally streamed audience, he has to nail it. That “it” is the conveying of big-time excitement around the unveiling of Apple’s long rumored TV streaming and news subscription services. If Cook could toss in the reveal of AirPods 2 with a health monitoring function at a higher price versus AirPods 1), all the better.
Should Cook fail to stoke the spreadsheet of nervous Wall Street analysts on the profit potential of a TV streaming service in the age of Netflix (NFLX), well, then the dyed-in the-wool Apple bulls may be in for a tough time again.
No pressure, Tim.
Apple needs a win, ASAP
Apple may be one of the most widely owned stocks by fund managers (70% of active fund managers have a position in Apple, according to Bank of America Merrill Lynch), but that doesn’t mean these number crunchers are as enthralled with the tech giant’s prospects as in the past. No, Apple has become nothing more than a value play due to its “cheap” valuation (14 times forward estimated earnings, below the S&P 500’s multiple), predictable services revenue stream and unworldly capital return plans in terms of dividends and share buybacks.
In fact, Bank of America Merrill Lynch research shows Apple’s stock is under-weighted relative to the S&P 500. Hardly a vote of confidence in a company that for years has captivated the minds of investors.
Indeed the Apple believers on Wall Street are in need of a good old-fashioned confidence boost. Consider what they have been through of late: (1) they were pitched that the $1,000 iPhone X would be game-changing — it wasn’t, and sales have stunk globally; (2) Apple management removed key unit sales data from quarterly earnings releases; and (3) Cook dumped a massive post holiday sales warning that surprised the market.
All of this has taken a toll on Apple’s standing on the Street.
Apple’s stock is down 26% from its peak (S&P 500 down 9%) and has underperformed the otherwise hot S&P 500 this year. Bank of America Merrill Lynch tech analyst Wamsi Mohan says Wall Street is bracing for a decline in hardware sales this year. In turn, analysts have aggressively slashed their profit forecasts and remain concerned on Apple’s medium-term outlook amid fears of slowing innovation.
Enter TV streaming, please.
Missing wow factor
While new TV streaming and news subscription services won’t lead to an immediate boost to analyst profit estimates, it could get the market wondering what else Apple is working on. In other words, the wow factor around Apple could return to a certain extent.
Apple hasn’t hidden its desire to get more into the original content game being dominated by Netflix, Amazon (AMZN) and soon, Disney (DIS) via Disney Plus. The company plans to spend $1 billion developing original content, and is reportedly working with Hollywood celebs like Oprah and Steve Spielberg.
Now Cook has to sell that sizzle as a means to divert attention away, at least temporarily, from ongoing challenges on the hardware front.
“While Street numbers have now capitulated and more properly reflect underlying iPhone unit decline in FY19 with modest unit growth of low single digits expected in FY20, we believe behind the secret walls of Cupertino for the first time in the modern iPhone era the company is struggling to find the answer to turn this narrative around with services playing a major role and a linchpin to Apple's future success,” cautions Wedbush analyst Dan Ives.
“To this point, if Apple is successful on the video content subscription service launch slated for later this year with penetration of roughly 100 million subscribers in 3-5 years an achievable goal in our opinion, we believe this will add roughly $15 per share to our SOTP valuation on Apple and in a bull case scenario translate to a $215 per share valuation for the name,” Ives adds.
Ives says that even though a TV streaming service would be exciting news for Apple, it may have to do more.
“The company is definitely playing from behind the eight ball in this content arms race with Netflix, Amazon, Disney, Hulu, and AT&T/Time Warner (T) all going after this next consumer frontier investing significantly more dollars ($20 billion combined and counting per annum) on content. While acquisitions have not been in Apple's core DNA, the clock has struck midnight for Cupertino in our opinion and building content organically is a slow and arduous path, which highlights the clear need for Apple to do larger, strategic M&A around content over the coming year to ‘double down’ and drive the services flywheel especially with its new video subscription service set to be unveiled next month,” Ives says.
It’s show time
Cook has the opportunity to regain the narrative on Apple on March 25 after a string of negative news. Should Apple stir up the wow factor with its much-ballyhooed TV streaming service, it could get concerns over its next round of iPhones (that they will simply be iterative, not transformational) temporarily off the minds of investors.
Remember: streaming king Netflix has a $157 billion market cap. Apple has no real Netflix competitor, hence it has effectively ceded $157 billion in market cap to this tech rival.
Time for Apple to get a piece of that market.
Couple that with another dividend hike and big stock buyback announcement lurking this spring, the stage is set on March 25 for Apple to claw back lost gains.
If Apple’s March 25 event is a snooze fest then Apple bulls could expect to be reminded of a painful lesson... a cheap Apple stock sometimes isn’t cheap enough.
Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi
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