Big Red Flags at Apple Inc. (NASDAQ:AAPL)

Apple Inc. (NASDAQ:AAPL) is telling us, without telling us, that its phone business is saturated.  Clearly there is more market share that is possible, but domestically we had a degree of saturation a couple years ago, this was largely true in Europe too, but China Mobile came on board and boosted sales, but now that may be saturated as well.

AAPL peg ratio

We will not be sure until after more data comes in, but the shift identified by Goldman Sachs Group Inc (NYSE:GS) is a tell that should not be ignored.  Goldman Sachs believes that Apple is transitioning from a hardware model to a service model, which means they are shifting their growth focus away from phones and onto monthly subscription costs, like for the icloud and music, in addition to others.

I do not think Goldman is wrong, and in fact I believe that Apple sees the need to find growth from new sources, and this is a direct result of mobile handset saturation, but the audience that Apple has captured allows them to access customers directly and immediately, where competitors like Pandora Media Inc (NYSE:P), for example, need to seek out customers.  That's a material difference, and a competitive advantage Apple will have in a service-focused environment, but there is a problem.

The problem is that Apple is not the best at providing services like that.  They are okay, arguably good, but their wheelhouse is hardware, mobile phones, laptops, and computers.  In venturing into a service-growth oriented model Apple is moving into uncertain waters, and investors must recognize that.

Goldman is talking about $143 in services fees per customer, which is about 4x the Alphabet Inc (NASDAQ:GOOGL) rate, but that is a very optimistic outlook and it assumes a full capture, which is probably not likely across the board. 

The 42% increase in share price that Goldman has suggested is also extremely unlikely.

If Apple's mobile saturation is almost reached and they are transitioning their growth model I consider that to be a big red flag for investors who have come to love Apple for their phones.  They have been the best at phones, I love my MacBook Pro, it is the most powerful laptop on the market for what I do, but I think investors are often blind to risks in Apple.

AAPL EPS Growth Rate

According to analysts the next quarterly release should show a 6.52% earnings contraction from AAPL on a TTM basis versus the prior period, but this is not completely unusual; Apple also had a 5.01% contraction in Q1 2013, so an EPS contraction is not unheard of, but it's definitely not a good thing, and when it is happening at a time when mobile saturation may have hit and a growth oriented transition is underway that adds to the uncertainty.  The added risk is that Apple is not the best at offering services, so if the company is considered differently as Goldman suggests, it will not be considered best of breed. 

There are risks here, but I am not ready to call AAPL short just yet.