Apple (NASDAQ: AAPL), famous for the iPhone, iPad, and iTunes, is still going strong after 45 years. It’s now pushing into the health care and streaming markets and growing its services business.
Apple Services include music, TV, fitness channels, news, books, podcasts, Apple Pay, iCloud and more.
Is Apple a good investment?
Apple is constantly innovating and will introduce new products during a special presentation in September. Sales and EPS growth continues to beat expectations, but supply chain problems and China's COVID-19 lockdowns have caused supply headwinds.
The buzz around Apple continues. But as a $2.7 trillion company, can investors expect continued growth?
Apple’s business has evolved to keep up with the times and consumer desires. It continues in this vein, and although it’s much harder to grow a trillion-dollar company exponentially, there are still many reasons investors like this stock.
With these points in mind, and with the company’s outlook, it makes sense for investors to ask themselves, “Is Apple a good investment, and should I buy Apple stock?”.
Fundamentals of Apple stock
The financial fundamentals of Apple are impressive. It’s one of the most valuable companies in the world, with a market cap of $2.7 trillion.
It’s also extremely profitable.
Apple’s share price rebounded in the 1990s after launching the iPhone.
And for the past nine years, the iPhone has been the biggest driver of revenue for Apple.
In 2020, Apple drew around 80% of its revenues from product sales and 20% from services.
Between 2013 and 2020, Apple’s gross profit margin hovered around 38%. It then enjoyed higher profit from its Services business. This, along with product price hikes and improved hardware profits, has pushed its gross profit margin above 43%.
Meanwhile, its gross operating margin is around 35%.
The Company believes, in general, gross margins will be subject to volatility and downward pressure.
Apple currently has a price-to-earnings ratio (P/E ratio) of 27.
Historically, Apple’s P/E hovered around 16 until late 2019.
So, this higher P/E makes some investors nervous.
Not all, though. For Apple is an innovative company, and its Services business has changed the game. It’s now operating in several new areas, which don’t have the high overheads of hardware and its restrictive supply chains.
Meanwhile, Apple’s EV/Sales ratio is 7x.
Earnings per share (EPS) is 6, and its forward dividend yield is 0.6%.
The Apple share price is trading around $167, which is down 8% from its 52-week high and up 29% from its 52-week low.
Its debt pile is $119bn, and it has around $48bn in cash on the balance sheet.
Analyst price targets for Apple stock currently range between $130 and $220 per share.
The 12-month average target is $181, which gives an 8% upside from today.
What is the bull case for Apple?
Apple is undoubtedly a leading American company with a lot to offer. Apart from its enticing hardware and quality services, the company is investing heavily in new areas.
These include healthcare, self-driving electric vehicles, augmented and virtual reality (AR/VR), plus artificial intelligence and machine learning.
Outperforming top indexes
In the past five years, Apple has outperformed the Dow Jones Industrial Average (DJIA), the S&P 500, and the NASDAQ.
Over its lifetime, Apple has split its stock five times during 1987, 2000, 2005, 2014, and 2020. This has increased shareholder value over time.
At initial public offering (IPO) in 1980, Apple stock cost $22.00 per share. On a split-adjusted basis, the IPO share price was $0.10.
This means someone investing $1,000 at IPO would now have 10,000 shares worth over a million dollars.
Since 2012, Apple has reduced its share count from 26.5 billion to 17.1 billion through share buybacks.
Apple’s dividend and share buyback program adds value to existing shares. This keeps long-term shareholders happy.
Warren Buffett is a fan
Since 2016 Warren Buffett’s Berkshire Hathaway has held Apple shares in its portfolio. It now holds around 5.5% of Apple stock, which accounts for approximately 40% of Berkshire's equity portfolio. This is greatly encouraging for potential investors, as Billionaire Buffett has an exemplary track record of investing in quality companies.
In addition to Buffett’s stamp of approval, Apple is a favorite among institutions.
In fact, AAPL stock is held in 356 exchange-traded funds (ETFs), and US ETFs hold 1.9bn shares of Apple.
Meanwhile, short interest, which means traders betting against the stock, is only 0.72%. This shows overwhelming support for the company.
Apple is strongly committed to protecting user privacy. This is something its consumers value and goes a long way to keeping them loyal.
What is the bear case for Apple?
There is a lot to like about Apple as an investment, but even the world’s most valuable companies face shareholder risks.
With its overpowering reach, security is paramount in attracting and retaining customers.
While privacy is utmost in Apple’s quest for user protection, it threatens to cause legal problems for the company. The EU antitrust chief recently warned Apple against using privacy and security as excuses for anti-competitive behavior.
Meanwhile, the world is experiencing a global shortage of semiconductors, affecting many tech companies, including Apple. This could potentially impact revenues for some time.
Because Apple operates across various sectors; entertainment, hardware, software, AI/AR/VR, and potentially EV, its competitors are varied.
But no one company is truly equal.
Some conglomerates it competes with, in various ways, include Samsung (KRX: 005930), Huawei, Microsoft (NASDAQ: MSFT), and Dell (NYSE: DELL).
Analysts are predicting minimal growth in the next year.
After exceeding expectations for many quarters, a setback may knock investor confidence and cause the share price to fall. Plus, sticky inflation and the potential for a recession is weighing on investor sentiment.
Should I invest in Apple stock?
Apple has proven time and again that it’s not to be underestimated. It’s a dominant brand that continues to command considerable market share and innovate with new ideas.
Meanwhile, its history of stock splits shows Apple appreciates its shareholders, and this may occur again in the future.
Being such a valuable company raises the question of whether it can continue to grow. And continued regulatory scrutiny is likely to be expected.
But investors should remember when Apple hit the half-trillion-dollar mark in 2012, analysts widely expected the top. Nonetheless, Apple reached $1 trillion in August 2018, and two years later, doubled that to $2 trillion.
Altogether Apple seems to be a relatively risk-free investment in a long-term portfolio.
Article updated: August 2022