Is Apple’s share price still benefiting from product diversification?

Apple’s [AAPL] share price is down 4.5% this year (as of 8 June’s close), and 2.7% for the month.

The stock received a rare analyst downgrade, which hasn’t helped matters, with New Street’s Pierre Ferragu giving Apple a sell rating. In a note to investors, Ferragu suggested that the record-breaking iPhone 12 sales seen in the last earnings update seem unsustainable.

Many analysts have predicted a super-cycle in smartphone sales caused by the shift to 5G. However, Ferragu reckons that iPhone sales are likely to slow in the second half of the year, especially if the next upgrade to the phone isn’t all it’s cracked up to be.

“The key question is how things shape up for next year, as the current super-cycle has brought forward demand, the next iPhone line up is likely a ‘12S’ type with limited innovation, and consumers spend less on consumer electronics as the economy re-opens," Ferragu wrote.

Ferragu has a $90 target on Apple’s share price, which would see the stock facing a 29% decline (on 8 June’s close). The bearish target comes at a time when the tech giant is making headlines for the wrong reasons in its quest for diversification.

Is Ferragu right in his prognosis or will moves into electric vehicles, payments and subscription services pay off for Apple’s share price?

What are recent headwinds for Apple’s share price?

Apple car sees executive exodus

Apple’s plans for a self-driving electric car is one of the firm’s bigger bets, but the road has been bumpy in the first half of the year.

In February, the project lost Benjamin Lyon, one of the architects of the original team, who left to become chief engineer at Astra. That was followed by the departure of James Waydo, who led the car safety and regulation teams, and then most recently Dave Scott, who led a team working on the car’s robotics.

How much impact this has on Apple’s share price in the near to mid-term is debatable. Bloomberg’s Max Gurman writes that if the iPhone maker does release a self-driving car, it won’t be until later in the decade.

While Apple has yet to make a formal announcement on its self-driving car, the departures don’t seem to be slowing down its EV ambitions. This month it has emerged Apple is in talks with China’s CATL [300750] and BYD [1211.HK] for the supply of lithium batteries.

Gurman points out that Apple has been “actively recruiting car industry experts to fill out the division’s leadership team”. Hundreds of engineers are building the underlying technology, with former Tesla [TSLA] top engineer Doug Field running the show. This follows a Reuters report from December suggesting Apple was targeting a 2024 release, meaning any meaningful impact the car will have on Apple’s share price seems a way off right now.

Apple Card outage

Contactless payments became the norm during the pandemic. In a survey conducted by eMarketer, in-store mobile payments jumped 29% in the US last year. That same survey found that more than half of all smartphone users will use mobile payments by 2025, up from circa 40.1% in 2020.

So when Apple Card experienced an outage in June, it hit a lot of people. Why does this matter? Well, strong hardware sales mean that Apple is able to easily cross-sell its software and subscriptions services. iPhones now prompt users to sign up to Apple Pay, with the service growing from 441 million users in September 2019 to 507 million users in 2020, according to a Loup Ventures survey.

While this was a well-covered story, however, Apple’s share price looks to be resilient to the technical blip, climbing 2.3% so far this week (to 8 June’s close).

Where next for Apple’s share price?

Apple’s share price gains used to be reliant on iPhone and Mac sales. However, diversification efforts have paid dividends. In the second quarter, the company saw double-digit growth in all its products and, while Apple’s hardware sales delivered, growth in its high margin services business saw a 26.7% year-on-year growth. This area includes iCloud, App Store, and subscription services like Apple Music.

“We now have over 660 million paid subscriptions across the services on the platform, and that’s up 40 million from the previous quarter, which is an acceleration from 35 million,” Apple CEO Tim Cook told CNBC in April.

Wall Street has pinned an average $159.85 on Apple’s share price - hitting this would represent a 26% upside on 8 June’s closing price. That will mean delivering growth not only in hardware, but also its services business. A downturn in iPhone sales — as predicted by Ferragu — could lead to a slowdown in growth for its software products.

Yet if Apple is able to keep profitably diversifying — even jumping on the electric vehicle bandwagon — then there could be further upside left in the stock.