Investing

Top Apple analyst: The surge in services is not enough because 75% of business likely to decline

Key Points
  • Big questions still remain about the fate Apple's hardware business, says Bernstein's Toni Sacconaghi.
  • Apple shares surged after it reported an earnings beat.
  • However, Sacconaghi says "the business is not particularly healthy."
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Sacconaghi: People don't want iPhones this cycle

Big questions still remain about the fate of Apple's hardware business, particularly the iPhone, top Wall Street analyst Toni Sacconaghi told CNBC on Wednesday.

The tech giant's stock is surging after it reported earnings after the bell Tuesday that beat expectations.

"Expectations were low and they managed to modestly beat those but in absolute terms, the business is not particularly healthy," the Bernstein senior technology research analyst said on "Fast Money: Halftime Report."

"We had iPhone revenue down 17% despite the fact that Apple had to cut prices to simulate demand in the quarter," added Sacconaghi, a five-star-rated analyst on TipRanks, an analyst review service.

Customers look at products in an Apple store in Beijing on December 11, 2018.
Greg Baker | AFP | Getty Images

iPhone sales accounted for 53.5% of Apple's revenue for the company's fiscal second quarter.

However, combine that with the Mac and iPad, which are also declining, and "you have 75% of the company that ultimately is unlikely to grow and more likely to decline over time," Sacconaghi said. "That remains the core issue."

One of the growing businesses CEO Tim Cook highlighted during a call with analysts is Apple's services revenue, which includes subscriptions like Apple Music and iCloud.

"It was our best quarter ever for services, with revenue reaching $11.5 billion," Cook said. Services revenue was up 16% from $9.19 billion in sales the same period last year.

Sacconaghi called the services business "a real testament to both execution and their vision of what this business can be."

If services and wearables continue to grow, it can help balance out the declines in iPhone and other hardware, but it won't help push revenues into positive territory, he said.

"Over the next few years, revenues will be about flattish for Apple."

By his math, if 20% of the company is growing 10% to 15%, it can offset about a 4% decline in the remainder of the company, which is he said is "not an unrealistic outlook."

That said, the iPhone business is cyclical and could start looking up when 5G comes out in late 2020, Sacconaghi pointed out.

"We could have consumers say, 'Wow this is a phone we really need because 5G is really compelling' and revenues could be up double digits."

Shares of Apple were nearly 7% higher in afternoon trading Wednesday.

— CNBC's Kif Leswing contributed to this report.

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