Apple's stock is no longer a compelling investment as the business transitions away from its historic, device-based model to one that emphasizes services revenue, according to one of Wall Street's top tech analysts.
Andy Hargreaves of Keybanc Capital Markets warned would-be investors that Apple's pivot into services is a dicey move into a competitive market, where companies succeed or fail based on how much profit they can eke out of each user.
That bodes poorly for the iPhone maker, the analyst wrote in a note, since gross profit per user has declined at a 10% annualized rate over the last five years.
"We believe Apple's Services narrative is largely priced in, as AAPL's valuation no longer appears attractive relative to other large services businesses," Hargreaves wrote.
"If we are to call Apple a services company, we should evaluate it on typical services metrics of user growth and revenue and profit per user," he continued. "Apple's user growth is decelerating due to market saturation and its gross profit per user has been declining. ... These are not particularly attractive metrics for a services business."
Hargreaves has a sector-weight rating on Apple shares and thinks the company's fiscal 2020 earnings per share will total $12.50, below consensus expectations of $12.68 in FactSet data.
"Apple's hardware sales are essential to virtually all Apple services, which suggests the two are part of a cohesive whole," he added. "Apple's breakdown of Hardware and Services revenue and gross profit is increasingly irrelevant, in our view, as changes to segment reporting have prompted Apple to book several aspects of what most would think of as a hardware sale in the Services segment."
Despite KeyBanc's lackluster outlook for the company's services business, Apple shares are easily outpacing the broader stock market in 2019. The stock is up over 40% through Wednesday's close versus the S&P 500's 19% gain.
Notwithstanding the outperformance this year, however, Hargreaves argued that even booking hardware sales in the Services segment may not be a long-term fix given recent iPhone sales patterns.
"We estimate the base of iPhone owners with new iPhones is now 420M, and has been stagnant over the last 12 months," he continued. "The high-end smartphone market appears highly saturated and we see limited opportunity for significant share gains. This suggests iPhone user growth will continue decelerating."
Hargreaves is one of Wall Street's leading technology analysts and is ranked No. 106 of 5,550 total analysts on Wall Street tracked by TipRanks. Investors who followed his buy and sell ratings since January 2009 have seen an average return of 23.5%, according to TipRanks.