There’s no denying it’s been a good year for Apple Inc. (NASDAQ: AAPL). AAPL stock is up 26.9% thus far in 2019 and the company just announced that it will be expanding its Seattle workforce by 2,000 employees over the next five years.

But all is not right at the core of the software giant.

 

Investors (Eventually) See Through Stock Buybacks and Dividend Increases

To begin with, second-quarter results were a mixed bag, even though Apple CFO Luca Masestri was quick to point out the positive.

“We generated operating cash flow of $11.2 billion in the March quarter and continued to make significant investments in all areas of our business,” Masestri stated in an April 30 release.

“We also returned over $27 billion to shareholders through share repurchases and dividends. Given our confidence in Apple’s future and the value we see in our stock, our Board has authorized an additional $75 billion for share repurchases. We are also raising our quarterly dividend for the seventh time in less than seven years,” he said.

Apparently, investors shared Masestri’s optimistic outlook, as shares of AAPL shot up 4.9% the following day (May 1).

What Masestri didn’t point out, however — and what Wall St. soon seemed to realize — is that second-quarter revenue declined by 5% year over year and earnings per diluted share were down 10% from the previous year as well.

As a result, Apple stock quickly came back to Earth. By May 10, AAPL was trading below its pre-earnings-announcement price of $199.90 and, by June 3, it was selling for $173.30. Apple stock has since rallied, but was still priced below $200 as of June 24.

Leading the quarterly revenue decline was a 17% decrease in iPhone sales, which is a huge concern given that, at one time, the iPhone was Apple’s signature product — one that helped the former computer company reinvent itself and become the world’s most valuable corporation.

Sure, some — including Apple CEO Tim Cook — are saying that the worst of the smartphone slide is now over and that the 2020 iPhones are something to behold. And while that may be, even Apple knows it needs to diversify, which is why Cook and other company officials have put so much emphasis on services revenue.

 

Apple Saved by the Services Revenue?

Services revenue growth is slowing. It increased 16% year over year last quarter — but that was down from a 19% YoY gain the previous quarter.

Notice the headline of the aforementioned earnings announcement: “Services Revenue Reaches New All-Time High of $11.5 Billion.”

Here’s the problem, though: services revenue growth is slowing. It increased 16% year over year last quarter — but that was down from a 19% YoY gain the previous quarter. Sure, the argument can be made that the slowdown is due to seasonal factors, but it’s still a concern.

And Apple’s foray into the streaming world — while understandable and even commendable — is not likely to be the game-changer that the iPhone was. There was a lot of competition in that arena to begin with — and it seems to be increasing every day.

Netflix (NASDAQ: NFLX), Comcast (NASDAQ: CMCSA), Amazon (NASDAQ: AMZN) and, now, Disney (NYSE: DIS) are already offering their own streaming service or preparing to do so. Plus, as we all know, the entertainment world is fickle. 2005 James Blunt, the guy who sang the hit song “You’re Beautiful,” can quickly become 2019 James Blunt, the guy “who sang that one song — whatever happened to him?”

No, for Apple to prosper in the future as it has in the past, it’s going to need to find other revenue streams as innovative — or nearly as innovative — as the iPhone.

And that’s not an easy task.