Apple Inc. (ticker: AAPL) produces the iPhone, iPad, Apple Watch, Mac computers and other personal computing devices. In addition, its Services segment includes its App Store, Apple Music, iCloud and licensing businesses. In the past 20 years, Apple has been one of the best investments in the entire market, generating a total return of roughly 54,730%. However, Apple is now the most valuable company in the U.S. market with a market cap of nearly $3 trillion.
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After gaining another 41.4% year to date in 2023 through Sept. 6, investors are understandably questioning whether or not there’s any upside left for the iPhone maker. Here are three pros and three cons to buying AAPL stock after its recent run:
Apple Stock Pros
Apple’s innovation. In the past 20 years, Apple has released one innovative product and service after the other. From the release of the first iPhone in 2007 to the launch of its Vision Pro wearable headset device in 2023, Apple has consistently shown it’s always looking for the next big thing.
Morningstar analyst Brian Colello says each new product and service helps Apple further monetize its global community of more than 1 billion customers.
“We view the iPhone as a revolutionary product that created the smartphone ecosystem and transitioned computing habits away from the PC. The robust app store helped foster iPhone adoption and grow Apple’s user base, with applications ranging from productivity, social media, shopping, gaming, music and so on,” Colello says.
Apple services. Apple was once all about the iPhone, but the company made the decision to emphasize high-margin services several years ago. In the second quarter, Apple reported $21.2 billion in Services segment revenue, about 25.9% of its total revenue. CFRA analyst Angelo Zino says growing Services revenue will help Apple increase its profitability even further.
“We forecast further upside to average selling prices in the coming years (e.g., foldable phones) while ongoing growth within the installed base should keep services expansion intact (e.g., advertising, gaming, bundling). Margins could offer upside ahead, on better mix and declining component prices,” Zino says.
Buffett’s backing. One way to determine whether or not Apple is a good investment is to ask the most accomplished investor on Wall Street. As it happens, Apple is the single largest stock investment of the Oracle of Omaha, Warren Buffett. In fact, Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) owns more than $160 billion in AAPL stock, which now represents nearly half of Berkshire’s total investment portfolio. Buffett is known for his long-term outlook and value-oriented approach to investing, so his huge position in Apple suggests he has high hopes for the stock in coming years.
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Apple Stock Cons
Premium product pricing. Apple has a reputation for high-quality devices, but that reputation comes at a high price. During the March quarter of 2023, Consumer Intelligence Research Partners estimated the average selling price of an iPhone hit a record high of $988, up from $873 at the end of 2020. In 2007, the original iPhone cost $499. In 2022, the standard iPhone 14 was initially priced at between $799 and $1,099, depending on storage. While Apple has taken strides in recent years to try to expand its customer base outside of the premium segment with the iPhone SE and other lower-end products, its focus on premium markets may limit its long-term growth opportunities.
AI technology risk. Many investors see artificial intelligence, or AI, as the next revolutionary trend in the technology world. Big tech companies including Microsoft Corp. (MSFT), Alphabet Inc. (GOOG, GOOGL) and Meta Platforms Inc. (META) have made AI technology a priority and are seemingly among the early market leaders in the space.
Apple has historically been extremely secretive surrounding its internal product development, but it’s already falling behind competitors in launching large language models, AI chatbots and generative AI products. CEO Tim Cook has said Apple plans to take a “deliberate and thoughtful” approach to AI technology, and the company has given investors no reason to expect a major Apple AI product anytime soon.
iPhone market saturation. Apple reportedly sold an estimated 232.2 million iPhones in 2022 and generated $205.5 billion in iPhone sales. But while existing Apple customers will continue to upgrade their iPhones, Apple may be running out of new iPhone buyers. In fact, the 2022 iPhone unit sales estimates aren’t much different than the 231.2 million iPhones Apple reported selling in 2015.
Bank of America analyst Wamsi Mohan projects Apple’s fiscal 2023 iPhone sales will decline 11% year over year.
“The guidance suggests typical launch timing for iPhones, but with the backdrop of a weak U.S. smartphone market we think it’s unlikely that iPhone [revenue] significantly re-accelerates,” Mohan says.
He also says Apple investors shouldn’t expect other device sales to offset those declines.
“iPads and Macs continue to suffer from post-COVID spending normalization,” Mohan says.
Bottom Line
Apple may not be the high-flying growth stock it once was, but its business is extremely profitable, its aggressive buyback program is supporting its share price, it has a massive global installed user base and it is by far Warren Buffett’s largest investment. In addition, Apple has a long track record of innovation, and its emphasis shift from device sales to services revenue could provide further margin upside.
However, the core iPhone market is reaching a saturation point, and Apple will need to continue to roll out competitive devices and services to continue to monetize its customers and justify its nearly $3 trillion valuation.
Fortunately, Wall Street analysts remain confident in Apple’s outlook in the next 12 months. The average price target among the 40 analysts covering AAPL stock is $200.68, suggesting 9.7% upside from its closing price on Sept. 6.
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Should You Buy Apple (AAPL) Stock? originally appeared on usnews.com
Update 09/07/23: This story was previously published at an earlier date and has been updated with new information.
