Should I Buy Apple Stock? 3 Pros, 3 Cons

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Over the past year, Apple (AAPL) has returned to its winning ways. The company continues to get traction from its iPhone franchise and has seen strong growth from the Mac line. In fact, for the past 12 months, Apple stock has clocked a gain of 40%, compared to just 13% for the S&P 500.

And some of the world’s best investors think that there is more room on the upside. Just look at billionaire Carl Icahn, who thinks the valuation of AAPL stock should be twice as high! This would put the market cap of AAPL at more than $1.2 trillion.

So is he right — does Apple stock have that much room to grow? To see, let’s take a look at the pros and cons.

Apple Stock Pros

apple-stock-aaplThe iPhone Juggernaut: Apple recently launched its new iPhone 6 and iPhone 6 Plus models, and the demand has been tremendous, with sales of 39 million units in the fiscal fourth quarter. This is up from 34 million in the same period a year ago. It was certainly an impressive performance in light of the lagging economic growth in Europe and China. No doubt, it helps that Apple’s competition is lackluster. Apple also has tremendous advantages. The company has a premium brand; there is seamless integration between hardware and software; and the iTunes/app ecosystem is pervasive (there are nearly 10 million registered app developers).

Innovation: Apple has been busy with R&D, and the results look promising. One example is Apple Watch, which could provide more compelling experiences and allow for interesting applications, such as fitness and health. But perhaps the most powerful innovation for AAPL stock is Apple Pay, which allows a consumer to make a in-person purchase with the press of a button. No digging through wallets or counting cash. There are already more than 200,000 merchants using the technology, which include retailers like Macy’s (M) and Whole Foods (WFM). True, it looks like there are glitches (such as double payments), but such things should be worked out quickly. It seems like a no-brainer that smartphones will eventually replace the wallet.

Financials: Fiscal Q4 showed that the company knows how to remain a growth play. Revenues came to $42 billion, up 12% on a year-over-year basis and profits increased by 20% to $1.42 per share. Cash flows from operations were $13.3 billion. With all the cash, the company has been aggressively buying back AAPL stock. During the past year, the buybacks amounted to about $45 billion.

But things aren’t all roses for Apple stock.

Apple Stock Cons

Security: Lately, security has become an embarrassing issue for Apple. First there was the hacking of nude phones of many actors and celebrities. At first, Apple downplayed things. But as the furor grew, the company started to take actions and beef up security. But the iCloud problems didn’t end there. Now it looks like the service has suffered a massive hack in China. The result could be the theft of millions of user IDs and passwords. If these incidents continue, Apple stock could feel the pressure.

iPad: Growth is fading for Apple’s iPad. In fiscal Q4, Apple sold only 12.3 million iPads, which was down from 14 million in the same period a year ago. This was actually the third consecutive quarterly decline. To reverse the slide, Apple recently launched several new models. But unfortunately, they are getting mixed reviews. If anything, the decline in iPads may be secular. One factor is the flood of low-cost tablets. But it also looks like consumers are less likely to upgrade. There may even be cannibalization from the larger iPhones.

Growth Opportunities: A few years from now, it could be tough to find new ways to crank out sales. Given the high-price points on iPhones, Macs and iPads, it’s a good bet that Apple could be facing a saturation point. True, Apple is looking to expand into other categories, such as payments, wearables and enterprise software, which involves IBM (IBM) as the main partner. But all these will add lots of complexity and involve markets that are highly competitive. In other words, there is much potential for Apple to stumble.

Verdict on Apple Stock

There are definitely things for investors to worry about APPL stock. The iPad could be in secular decline, there are issues with security and some of the new products — like Apple Watch and Apple Pay — could prove harder to get traction.

Despite all this, the fact remains that the iPhone will remain the driver of Apple stock for the foreseeable future. And the good news is that Apple has continued to innovate the technology and leverage its brand and powerful ecosystem. There should also be a nice boost in the upcoming Christmas season.

The valuation on APPL is also attractive. The forward price-to-earnings ratio is at 12X, which compares to 14X for Microsoft (MSFT) and Intel (INTC).

So, should you buy Apple stock? Yes — it should remain a solid way to benefit from the continued growth in mobile — at an attractive valuation.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/apple-stock-pros-cons/.

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