Cramer: We’re valuing Apple with the wrong number

Apple finally reported earnings on Tuesday, and Jim Cramer heard only one question about the stock — how the heck should it be valued?

“That is the conundrum facing Apple, the greatest wealth creator of our generation,” the “Mad Money” host said.

This is the same question that analysts are faced with four times a year when they are required to peer into the future and derive from the company’s quarterly earnings report to provide investors advice on what the stock is really worth.

“And for my money, I think they are all blowing it,” Cramer said. (Tweet This)

Analysts can adjust all the models, price targets and phone counts they want, but those inputs are only part of the story. As a result, they look at Apple as if it were the same as any other hardware company such as a Hewlett Packard, EMC or Intel.

The conclusion reached? That Apple owns the cellphone market as it currently exists, and now that it has forecast its first down year that means the cellphone business is saturated.

Workers prepare for the opening of an Apple store in China.

Chance Chan | Reuters
Workers prepare for the opening of an Apple store in China.

It would be one thing if Apple had something else to make up for the downturn in iPhones, but iPads aren’t selling like they used to and Macs seem to have reached a peak in units, too. The Apple Watch and Apple TV are doing well, but those sales aren’t close enough to make up for the iPhone deceleration.

“That means the analysts have no cover. They don’t want to downgrade the stock because it’s too cheap on earnings, even if those earnings are going down,” Cramer said.

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Additionally, Apple has too much cash to be downgraded. Therefore, many analysts have kept a half-hearted buy rating on the stock and wished they had downgraded it higher. Cramer considers all of these analysts to be traditionalists, and they are all looking at Apple as if it were the same as an IBM that peaked on mainframes.

“I am a generalist, not a technology analyst, and I can’t view Apple just like another hardware company,” Cramer said. (Tweet This)

Every other international company that Cramer follows found it impossible to raise prices last quarter because of the environment. They all complained about foreign exchange ratios that lowered the average price of the goods they sold.

But Apple didn’t.

That is when Cramer realized that it all comes down to brand loyalty for Apple, and the analysts were looking at the wrong number.

One metric that can quantify the value of brand loyalty is called “service revenue.” Apple reported that installed base revenues — the money paid for iTunes, music, app store licensing, service parts, iCloud and Apple Pay — grew at an astounding 23 percent year-over-year, jumping to $31.2 billion in 2015.

“That is the number we need to key in on, not how many devices they sell,” Cramer said.

Ultimately, Cramer thinks the brand loyalty for Apple is so great customers won’t switch to another company. So maybe Apple doesn’t need to worry about peaking phone sales. Maybe it just needs to keep selling more devices, and let the service stream do the talking.

“By this time next year, it wouldn’t shock me if that service revenue number becomes the key metric, especially with the iPhone 7 right around the corner,” Cramer said.

If that is the case, then investors are getting a fantastic bargain for the stock at $93. So ,maybe when the analysts inevitably downgrade the stock, investors will realize that the revenue stream makes it worth owning when everyone else is throwing it away. That’s another reason why Cramer says to own it, not trade it.