Apple's fortunes still tied to iPhone despite services, wearable growth: Analyst

While Apple (AAPL) is expanding beyond the hardware business, its share price still depends on those sales, according to one tech analyst.

The tech giant reported earnings that beat analyst expectations on both the top and bottom lines this week. Yet Apple’s results gave Wall Street mixed feelings, as growth soared in services and non-iPhone items — but sales of the flagship device plunged 12%.

Although some analysts believe Apple’s future lies in its newly diversified portfolio of products, Longbow Research's Shawn Harrison told Yahoo Finance that it’s not that easy — especially for the stock price.

“If there is further incremental weakness in the iPhone, it is going to be difficult for the stock to go higher,” Harrison told YFi PM on Wednesday.

“It’s one of the most profitable products Apple sells. It’s still the halo product,” he added. “It had less than 50% revenues this quarter, but this is usually the tough quarter for the iPhone.”

In its fiscal Q3, sales of the iPhone swooned — something Apple tried to counter by introducing trade-in programs and financing. Still, iPhones only made up 48% of total revenue.

In the comparable year-ago period, iPhone sales made up 56% of Apple’s total revenue.

Apple iPhone Sales

“If that happens in the September and December quarters, Apple has a much bigger problem because at the end of the day, devices help grow the ecosystem,” Harrison explained.

“The ecosystem growth means more services revenue long-term, which is what Apple’s looking to drive,” he said. However, “they need at least iPhone stabilization-- not a big drop as they saw last year. If that happens, you’re not going to see the stock continue at these highs.”

Apple looks to 5G

But Apple has more in the pipeline for its iPhones. The tech giant plans to release three new phones, as well as its first units with 5G chips. Its purchase of Intel’s 5G modem business shows Apple is looking to become independent.

“In the interim, they’re reliant on Qualcomm (QCOM),” Harrison said.

“Long-term, 5G has opportunities even beyond the iPhone as we connect devices that haven’t even been thought of or that maybe Apple is dreaming up at this point in time. Internalizing something that had been a conflict for them could give them leverage over peers. That is what the Intel deal represents,” he added.

The deal is expected to finalize in the fourth quarter of 2019, as the company looks for new ways to get consumers interested in its products.

Apple does “need at least for people to be excited about the iPhone,” Harrison said. “If you don’t sustain growth into that, or at least stability, that brings into question whether the 5G iPhone-- which many bulls are betting on to be a success-- will be helping out the stock from here.”

Meghan Fitzgerald is a producer with Yahoo Finance.

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