Apple (ticker: AAPL) is the largest publicly traded company in the world. As such, it might not surprise you to find out that it’s also one of the most widely owned stocks by retail investors.
But if it isn’t in your portfolio should you buy AAPL stock now? And if you already own some, should you invest in more Apple shares?
[See: The 25 Best Blue-Chip Stocks to Buy for 2017.]
Before you make those decisions you’ll certainly want to take an inventory of the pros and cons involved when you buy Apple stock. Here’s a quick rundown of the biggest headwinds and tailwinds for the Cupertino, California-based tech giant.
Arguments For Buying Apple Stock
One can pick and choose any number of pros and cons for Apple, but there are three big ones currently facing the company.
A solid and sustainable dividend. In 2012, AAPL stock began paying a quarterly dividend for the first time in nearly 17 years. Companies only reinstate dividends when they’re confident they can pay them in perpetuity, and with the blockbuster success of the iPhone and iPad, Apple had developed two cash cows.
Since then, Apple has routinely increased its dividend annually, and more importantly, the company has more than enough earnings power to support a steadily increasing cash dividend. The payout ratio — the percentage of profits used to pay dividends — is just 28 percent, a remarkably low ratio.
Given its cash hoard of about $250 billion, even if earnings fell off a cliff Apple would be a solid dividend stock with the ability to dish out income to its shareholders.
“To put that in perspective, there are only 12 companies in the S&P 500 with a total market capitalization greater than Apple’s cash holdings,” says Bob Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania.
A strong ecosystem. One of the strongest selling points for Apple products is how seamlessly they speak to and work with each other. For example, you can view iMessages not just on your iPhone but on your iPad, Mac and Apple Watch; Apple’s headphone products work more smoothly than rivals with Apple devices; free Apple Music trials are given to iPhone buyers; iCloud, apps and iTunes content can be accessed across devices, and so forth.
This keeps users locked in and hopelessly reliant on Apple products.
“Apple excels with respect to the network effect as the value of iPhones and iPads increases as more apps become available,” Johnson says, referencing another important part of the ecosystem.
Growing revenue in the Services segment. In 2016, revenue from Services, which includes AppleCare, Apple Pay, the AppStore, iTunes, Apple Music and other software segments, grew 22 percent to $24.3 billion. It is now the second-largest division of Apple by revenue behind the iPhone. That’s great for shareholders not only because it’s growing at a healthy pace, but because Services enjoys much higher margins than other business segments, benefiting Apple’s overall margins.
[See: 7 of the Best ETFs to Own in 2017.]
Thankfully this high-margin section of the business isn’t expected to stop growing anytime soon, either.
“Service revenue is expected to double in the next four years,” says K C Ma, finance professor at Stetson University.
Arguments Against Buying Apple Stock
It’s not all rainbows and sunshine for AAPL stock, of course. Here are the three biggest ones to keep an eye on.
Apple’s high-growth days appear to be over. Apple doesn’t grow like it once did, plain and simple. In fact, in recent periods it hasn’t grown at all. In 2016, AAPL reported its first year-over-year decline in quarterly revenue since 2003 as iPhone sales fell. While very modest growth appears to be returning, the fact of the matter is over 60 percent of the company’s revenue still comes from the iPhone. Considering that the smartphone market is now mature, low growth in iPhone sales will likely become the norm.
“There is a concern about the iPhone’s long-term growth prospects beyond the iPhone 8 and 10-year anniversary iPhone launches later this year. As the growth in smartphone sales began slowing, Samsung took back the title of global market share leader in the most recent quarter,” Ma says.
Current valuation. Apple stock, trading at around 17 times earnings, trades at the high end of its five-year price-earnings range. That range runs from 9.2 to 18.4, with an average of 13.5. Given the lower expected rate of growth just mentioned, it’s doubly concerning that Apple’s multiple should be 25 percent higher than its five-year average.
While the smartphone market is indeed maturing, many of those bullish on AAPL stock think the potential to grow in emerging markets may justify Apple’s valuation. That conception could be flawed.
“While Apple’s premium pricing strategy may help gross margin, it also limits unit sales growth as devices may not be cost effective for many emerging market customers,” Ma says.
Lack of innovation. Another reason Apple’s high valuation is a concern is the fact that Apple simply isn’t innovating anymore. Since Tim Cook took over as CEO in 2011, a sum total of two new products, the Apple Watch in 2015 and the HomePod in 2017, have been released. The first is generally considered a commercial failure and the second is a copycat of Amazon.com’s ( AMZN) Echo, which was itself first released a full three years prior, in 2014.
Conclusion
There’s no doubt that Apple stock is special. There’s no other company on Earth with the cash hoard and consistent profitability that Apple provides. It looks as if that won’t change anytime soon, due to the strength of the brand and ecosystem.
[See: 7 of the Best Stocks to Buy for 2017.]
However, every stock has a fair price — even stocks in companies with unholy gobs of money — and risks should be taken into consideration when trying to value a stock. When you consider the relatively high P/E ratio of AAPL, the relatively low growth rate of Apple, and the general ability of tech firms to usurp one another suddenly and unexpectedly, long-term investors should think carefully before investing.
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Should You Invest in Apple (AAPL) Stock? originally appeared on usnews.com
