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Investing  | September 16, 2019

Apple stock is over-valued, says Goldman Sachs. And a change in its accounting method will trigger a decline in its stock price.

But I see far deeper reasons to take your profits on Apple. Apple did not respond to a request for comment.

(I have no financial interest in the securities mentioned in this post).

Goldman argues that the stock will fall because the accounting method used for an Apple TV+ trail will have a “material negative impact” on earnings, CNBC reported. Goldman analyst Rod Hall wrote, “We believe that Apple plans to account for its 1-year trial for TV+ as a ~$60 discount to a combined hardware and services bundle.”

Goldman believes that Apple is changing its accounting method to shift artificially its revenue from hardware to services – cutting its price target for the company to $165.

As Hall noted, “Effectively, Apple’s method of accounting moves revenue from hardware to Services even though customers do not perceive themselves to be paying for TV+. Though this might appear convenient for Apple’s services revenue line it is equally inconvenient for both apparent hardware ASPs and margins in high sales quarters like the upcoming FQ1′20 to December.”

Where will Apple’s Growth Come From?

Goldman’s conclusion highlights a deeper problem at Apple. CEO Tim Cook has not invented anything groundbreaking since he became CEO about seven years ago.

And that could help explain why Apple does not expect to grow in 2019. In January Apple forecast a 4% decline in revenue for 2019. In its July-ending quarter, Apple reported a 1% revenue increase and said it expected revenues for the current quarter to range from $61 billion to $64 billion, according to CNBC – the midpoint of which would represent a slight decline from Apple’s $62.9 billion in revenue in the same quarter of 2018, according to Apple.

What does it mean for a CEO to invent something groundbreaking? In the case of Apple, groundbreaking innovation means targeting a large existing market — such as MP3 players, cell phones, and tablets — and building a much better physical product — coupled with so-called killer apps — that make the hardware irresistible to consumers.

Under Steve Jobs, Apple made groundbreaking innovations with the iPod, iPhone and Tables (in coordination with creating the iTunes and App Stores).

By that definition, Cook has not innovated. But why would anyone expect that he could? He came to Apple as a supply chain expert. He has not broadened his skill set since he became CEO. I do not consider the Apple Watch to be a ground breaking innovation.

Apple`s strategy has changed for the worse under Tim Cook. To be fair, Apple is a larger company than it was when Cook took over. But the reason is that he has offered new versions of the innovations that Jobs created.

Sadly for Apple, given the level of competition in its markets, Cook's inability to innovate has caused Apple to fall behind these rivals. And since its biggest market — the smartphone — is maturing, Apple's revenues are falling.

Apple’s latest launches – new iPhones, AppleTV+, etc. – will not accelerate Apple`s revenue growth to the 20% or higher rates that make a large capitalization technology stock an exciting investment.

Getting there would require Apple to invest in new opportunities analogous to what Jobs did with the iPod, iPhone, and iPad. Since they were new and compelling to consumers, those products drove Apple’s rapid top-line acceleration.

But sadly for investors, the iPhone and AppleTV are in mature markets, and since they don’t present big increases in value for consumers, they won’t jump-start Apple’s growth.

Apple could be as successful in the future as it was in the past. It depends on who is CEO. Look at Microsoft. The company was very successful under Gates, it stagnated under Ballmer, And it has achieved new heights under Satya Nadella.

If Apple could appoint a CEO who could innovate, I think its future would be much brighter.

My advice to Apple’s board: Hire a CEO who can innovate.

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