Apple investors still lack a reason to get really excited about the stock

Apple has conceded that consumers are waiting longer to upgrade their iPhones to the latest models. There's just not enough reason for many consumers to hit the buy button earlier in what is known as the iPhone replacement recycle. Maybe it should not be surprising, then, that there's a similar push and pull between investors and Apple stock as the company tries to convince the market to dial back up the exposure from its recent lows.

Apple's stock price has rallied this year, and since its earnings earlier this week, the stock has moved higher. But for investors wondering why a stock that was over $230 last October and became the first U.S. company ever to reach $1 trillion isn't being viewed by investors as cheap enough to more quickly bounce higher, the answer is fairly obvious. There just isn't much to get excited about right now when it comes to the world's most profitable company (and even after Apple reported its highest-ever quarterly earnings per share on Tuesday), according to a high profile analyst who broke down the results for CNBC.

Apple shares finished January up by 5.5 percent and closed at a price of $166 per share on Thursday. But the move up trailed many market measures. The Dow Jones Industrial Average finished January up 7 percent, the S&P 500 was up close to 8 percent, and the Nasdaq finished the first month of 2019 up near 10 percent. The S&P's tech sub-sector was up roughly 7 percent for the month.

Lintao Zhang | Getty Images Chinese customers in an Apple store on January 3, 2019 in Beijing, China, one day after Apple pre-announced weak quarterly results that it attributed primarily to a sales slowdown in China.

Toni Sacconaghi, senior analyst at Bernstein, said the Apple results were not a big surprise since the company pre-announced weak sales in early January and sank as low as $142 after that market shocker. Starting the year with that handicap is one reason why Apple has had a hard time playing catch-up as the stock market took off to start 2019. But the Bernstein analyst said there were more signs of slowdown to focus on in the full quarterly financial disclosure made on Tuesday after the market close, and some big questions for Apple where answers are still lacking.

On the earnings call Tuesday afternoon, Sacconaghi calculated the midpoint of Apple's Q2 revenue guidance as implying "the steepest Q1 to Q2 sequential decline in iPhone revenue history."

In a subsequent interview with CNBC, the Bernstein analyst cataloged additional disappointments.

Gross margins were lower than Wall Street was expecting, a trend that could indicate that even as increased competition to the iPhone requires Apple to spend more on manufacturing better phones, there is only so much Apple can raise prices without risking the loss of customers. Sacconaghi has noted elsewhere that Apple has had to add better cameras, displays and chips, among other enhancements, and has had to give up some margin to not price itself out of the market.

Services continues to grow, but maybe not enough

Apple's services business continues to grow in size (and importance) to the company as it attempts to wean Wall Street off the iPhone sales-number obsession (it was last November when Apple shocked many investors by saying iPhone unit sales would no longer be disclosed). But services growth also decelerated year over year like the iPhone, the Bernstein analyst noted, though he added it was "still a pretty healthy number."

Apple's total installed base of users, the key to services revenue, grew to 1.4 billion. While an 8 percent year-over-year growth rate may seem solid, Sacconaghi said it is well below the rate at which it had been growing in the past two years: 15 percent in 2016, and 12 percent to 13 percent in 2017, according to his calculations.

He isn't the only analyst worried about this deceleration. The first question on the Apple earnings call from Morgan Stanley analyst Katy Huberty was about the installed base and services slowdown: "If you compare what you added in 2018 versus what you expect to add over the next two years, that implies a slowdown in annual net new subscribers. So should we be thinking about services as a lower growth segment than what you experienced in 2018?"

Apple CFO Luca Maestri offered plenty of answers — some easy to understand, others much more difficult to follow:

"A portion of this deceleration is truly just a reclassification of the amortization of free services that we've made in connection with the adoption of the new revenue recognition standard. And as we explained 90 days ago, this amortization of free services in the past was reported under Products and now gets reported under Services. The reclassification is actually dilutive to our growth rate because the amortization of free services is a relatively stable number, which gets applied to a growing base. So this reclassification reduces our growth rate versus the previous classification. This factor by itself represents roughly one-third of the deceleration that you're seeing."

The strength of the U.S. dollar also played a role, since Apple is not often repricing services based on short-term fluctuations in currency. Issues selling games on the App Store in China, a large business for Apple, took a toll, though the company expects these issues to be resolved. And its AppleCare package is seeing slower growth, Apple's CFO said. He also noted some positives: Apple has added 100 million users in the past 12 months alone, and within its installed base the percentage of users who are paying for at least one service is growing "very strongly."

The next great product from Apple isn't obvious

These issues, even if temporary, come at a time when there are other uncertainties.

"There are lots of risks," Sacconaghi told CNBC. Specifically, the trade war and the tariffs that would go into place as early as next month if the United States and China do not reach a deal. If China tries to boycott Apple or steer its citizens to Chinese products, "it can be very significant and negative" for Apple, the Bernstein analyst said.

Apple has more than 40 stores in China, and it has grown to be the iPhone's third-largest market.

President Donald Trump did say this week that he is encouraged by progress in trade talks with China and thinks a deal can get done.

Apple CEO Tim Cook told CNBC this week that he was encouraged by the recent comments from both countries.

But the Bernstein analyst said what got Apple to a 2018 share price and all-time high of $233 and a market valuation of $1 trillion hasn't changed, and it isn't buried in the margin, or services, or installed customer base numbers.

Stephanie Keith | Getty Images "Apple innovates like no other company on Earth, and we are not taking our foot off the gas," said Apple CEO Tim Cook on the company's earnings call Jan. 29, 2019.

"For Apple the question is, will they introduce exciting new products and services?" he said.

A new iPhone is expected in September, but "expectations are pretty modest and it won't be all that different than this year's," Sacconaghi said.

"What drives excitement around the stock is new products," the Bernstein analyst said, and he added that a new video content service would be the kind of idea that could help shape greater investor enthusiasm.

Apple CEO Tim Cook talked up the opportunity in video on the earnings call, telling analysts, "We see huge changes in customer behavior taking place now. And we think that it will accelerate as the year goes by to sort of breakdown of the cable bundle that's been talked about for years. And I think that it'll likely take place at a much faster pace this year. And so we're going to participate in that in a variety of ways."

There are reasons to be skeptical of Cook's assessment, at least his rapid timeline for the change. And the Apple CEO didn't reveal any breakthrough video idea.

He mentioned Apple TV, which "you're well familiar with," Cook said.

In addition, the company's Wi-Fi streaming tech AirPlay 2 has support on a number of different third-party TVs. And third-party video subscriptions are available through Apple, and "that's going to accelerate into the future as the bundle breaks down and people begin to buy likely multiple services in place of their current cable bundle," the Apple CEO said.

Original content will increase beyond some marquee deals already announced (e.g. Oprah).

"But today I'm not really ready to extend that conversation beyond that point. We've hired some great people that I have a super amount of confidence in, and they're working really hard, and we'll have something to say more on that later," the Apple CEO said.

Sacconaghi asked Cook on the earnings call about the all-important iPhone upgrade cycle — fact that efforts like Apple's battery-replacement program and making the iOS operating system work with older models is changing the iPhone average replacement cycle and that it could stretch out even further in years to come.

"The cycles — the average cycle has extended," Cook said. "There's no doubt about that. We've said several times I think on this call and before that the upgrades for the quarter were less than we anticipated. ... Where it goes in the future, I don't know, but I'm convinced that making a great product that is high quality — that is the best thing for the customer, and we work for the user. And so that's the way that we look at it."