Why Is Apple Inc.’s (AAPL) Stock Falling? iPhone Maker Transitions Into Value Stock Territory

Apple Inc. (Nasdaq:AAPL) isn’t exactly on Wall Street’s good side at the moment. The company’s stock fell more than 6 percent Wednesday, a day after Apple released financial results for the 2015 holiday quarter that featured flat iPhone sales. Apple also said it expects slower-than-anticipated revenue growth going forward.

But reasons for the Wall Street freak-out go deeper.

“What really spooked investors was [Apple CEO Tim Cook’s] negative comments around what he’s seen so far around greater China — specifically Hong Kong — because China is so key to the Apple growth story,” says Daniel Ives, managing director at FBR Capital Markets. “At this point Apple is not being valued like a growth company. It’s being valued as a mature company.”

Other financial analysts agree. At least part of the recent volatility in Apple’s stock has to do with investors grappling with the company’s transition away from its long-held status as a growth stock to a value stock.

What does that mean, exactly? To put it simply, growth stocks are those that are expected to increase in value at higher rates than the rest of the market — but they’re riskier investments. Value stocks are seen as investments that may bring steady returns over a long period time but aren’t expected to see explosive profit increases.

It’s not terrible to be a value investment. Apple would be joining the ranks of other slow-and-steady tech stalwarts like HP, IBM and Xerox. But there is a downside, says Angelo Zino, analyst at S&P Capital IQ.

“Historically, Wall Street hasn’t been kind to value-oriented tech names,” says Zino. “We’ve seen it when it happened to the likes of Microsoft when it flatlined for a decade. You’ve seen it happen to Intel. The value name has been historically designated to the old tech names.”

For much of the last decade and a half, Wall Street saw Apple as a growth stock, driven by explosive Mac, iPod and iPhone sales (and, for a brief period, iPad sales, as well). But with its tablet sales continuing to slide and iPhone sales expected to decline for the first time since 2007, the company’s shares have fallen into the latter category for investors. Hastening the transformation is the continued negative outlook for China’s slowing economy.

That could change in the second half of 2016, as analysts and investors wait for the anticipated “iPhone 7” in hopes that its drives growth again. But until that happens, investors are cautiously looking at any moves Apple makes in the next few quarters.

“[Apple is] looking for a new product cycle and they’re looking for a new market,” says Timothy Arcuri, managing director at Cowen and Co. “In the meantime the stock is cheap, they have a lot of cash and they have a lot of longer-term opportunity. But they’re just going through this transition.”

That said, Apple’s moon shot products have yet to materialize. Its live-streaming television service hasn’t gotten past the negotiation stage with content providers. Its ambitious “Project Titan” electric vehicle, aimed for a 2019 ship date, reportedly faces a number of setbacks, including a hiring freeze and the anticipated departure of its project lead, Steve Zadesky, according to the Wall Street Journal. And while the Apple Watch and Apple TV have brought in new revenue for Apple, they’re still drops in the bucket compared to the iPhone, which generated 68 percent of revenue during the holiday quarter.

In the meantime, Apple has placed increased attention on service revenue, which grew 26 percent during the holiday quarter to $6.05 billion, or about 8 percent of its total take. That was driven largely by services such as Apple Pay and Apple Music.

“Longer term you want to see Apple grow in areas like services such as Apple Pay and Apple Music, while at the same time gaining traction with the Apple TV and Apple Watch,­” says Bill Kreher, senior analyst at Edward Jones.

While that might help Apple add a new source of revenue growth, it doesn’t change the increasing perception among investors from Wall Street to Main Street that it is a value company. That’s because when it comes to the stock market, tech companies that place an emphasis on services often trade at lower price-to-earnings multiples.

While Apple could shake its value stock perception if the “iPhone 7” takes off, that may not be enough to convince investors that it’s poised for surging growth again.

“I think it’s still going to be a value stock until they can convince people that there’s another product cycle,” Arcuri says. “The iPhone 7 will help because the comparisons will be easier, but I don’t consider that to be a true product cycle. That’s just coming off an easier compare.”