How iPhone Can Make or Break Apple Stock

By Markets Fool.com

If Apple (NASDAQ: AAPL) sticks to its usual annual refresh for its iPhone lineup -- and the ever-active Apple rumor mill suggests it will -- the tech giant could be sending out invitations for a September launch event on Thursday or Friday of this week. As the launch event approaches, here's a look at why Apple investors are always so interested in iPhone, and why this particular iPhone refresh is so important.

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Apple's most important product

The No. 1 reason Apple investors are interested in the iPhone's success is simply because it represents by far the largest portion of the tech giant's revenue. Indeed, during Apple's most recent quarter, iPhone accounted for about 57% of the tech giant's total revenue. Notably, however, even this metric understates the share of Apple's revenue iPhone captures. In the trailing 12 months, a period that better captures the full seasonality of iPhone sales, Apple's iPhone segment accounted for a whopping 64% of total revenue.

Data retrieved from Apple's quarterly SEC filings. Chart by author.

Apple's other segments pale in comparison to iPhone. None of Apple's other segments -- iPad, Mac, services, or other products -- accounts for more than 11% on its own. Even more, Apple's iPad and Mac segments together only add up to a fifth of the tech giant's total revenue.

Another reason iPhone is so important to investors is because it's one of the company's most profitable segments, if not the most profitable. While Apple doesn't break down operating margin by product, management has indicated on a number of occasions that iPhone's share of the company's operating profits is even larger than its share of revenue.

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Considering iPhone accounts for the lion's share of Apple's revenue and an even larger share of profits, the product segment truly can make or break the stock's future. For instance, if iPhone revenue increases over the next decade, Apple shareholders will likely see excellent returns. On the other hand, if iPhone revenue struggles to grow or -- even worse -- declines, even Apple's price-to-earnings ratio of 12.6 today may be too high of a price to pay.

A critical time

But there's a more specific, timely reason for investors to be interested in Apple's rumored iPhone 7 launch next month. iPhone revenue has been declining for two quarters in a row. Many Apple investors, therefore, may be wondering: Have iPhone sales peaked?

iPhone 6s. Image source: Apple.

Apple's year-over-year declines in iPhone revenue started in the second quarter of the flagship year for the iPhone 6s, highlighting its failure to live up to the blockbuster flagship year that the iPhone 6 had had. In Apple's second fiscal quarter of 2016, iPhone revenue decreased 18% year over year. And this trend worsened in Apple's most recent quarter, with iPhone revenue falling 23% year over year. Adding fuel to the fire, Apple guided for total revenue in the current quarter -- the final quarter for the flagship year of the iPhone 6s -- to decline about 10%, suggesting management anticipates another difficult year-over-year comparison for iPhone.

Combine the iPhone's huge share of Apple's revenue and profits with its declining sales in recent quarters, and it's easy to see why iPhone 7, in particular, is so important. If the new smartphone fails to reinvigorate growth in the segment, investors could lose confidence in the tech giant's ability to grow its business from current levels.

Apple is expected to announce its newest iPhone lineup on Wednesday, Sept. 7.

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Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.