This year was a rollercoaster ride for Apple Inc. (NASDAQ:AAPL) stock. AAPL stock fell earlier this year due to problems in China and worries about market saturation, then it roared back to life with the iPhone 7. Billionaire investor Carl Icahn closed his position in Apple because of concerns over China, while Warren Buffett bought it over the summer, seeing gains as the AAPL stock price rose this autumn.
AAPL stock doesn’t seem overvalued at 13.5 times earnings and 11 times forward earnings. It enjoys high margins and pays a 2% dividend as well.
Will all of this in mind, should you buy Apple stock? There are a few other things you need to consider before answering this question. The following are three pros and three cons to owning AAPL stock.
Three Pros to AAPL Stock
Apple Stock Pro: Shift to Software and Services Revenue
Diversifying Apple’s revenue sources will help to reduce risk. Currently, iPhone sales make up two-thirds of AAPL’s revenue. With iPhone upgrade cycles lengthening, Apple seeks recurring revenue streams from services and software.
This appears to be working: Apple’s App Store saw the highest monthly sales ever in November. Services represent AAPL’s second largest revenue source, and are growing fast. This revenue source grew 22% in the last fiscal year. AAPL’s service sales in the first three months of 2016 exceeded Facebook Inc‘s (NASDAQ:FB) total revenue over that period.
Indeed, services could reach 29% of Apple’s gross profit in 2020. Software and services like Apple Pay, the App Store, iCloud, music from Apple Music and iTunes will put a floor on AAPL’s revenue in the advent of poor hardware sales.
Apple Stock Pro: Strong Competitive Moat
Global brand surveys regularly list Apple at the top of the world’s most valuable brands. Forbes estimated Apple’s brand value at $154.1 billion this year. Brand Finance put AAPL’s brand at $145 billion. AAPL also regularly comes out on top in brand loyalty, with Apple fans rarely switching to Android. Apple aficionados use Apple for just about everything: Apple Pay, Apple TV, Apple Music, Apple Home, iTunes and Apple CarPlay.
Apple’s brand represents unparalleled quality in hardware, software and services. And Apple’s ecosystem offers users a great deal of convenience. This keeps customers satisfied and loyal. And this creates high switching costs.
These advantages allow Apple to stand above all its competitors in pricing power. Apple took a whopping 104% of global smartphone profits this year. How can AAPL’s share be above 100%? Well, Apple’s competitors generally see razor-thin margins or operate at a loss.
Apple Stock Pro: Apple’s Cash Position
Earlier this year, some dispelled the myth that Apple holds several hundred billion dollars in cash. Nonetheless, Apple still commands a great deal of fiscal firepower. As of Sept. 24, Apple held $46.67 billion in short-term investments and $20.48 billion in cash.
In an uncertain world, a strong defensive position is a great asset. Stocks recently hit record highs — a bullish sign, but a reversal could be around the corner. Albert Edwards of Societe Generale recently found a chart showing global economic-policy uncertainty at all-time highs.
Nonetheless, Apple is not perfect: it faces some challenges, too.
Three Cons to AAPL Stock
Apple Stock Con: Stronger Competition
Apple might not retain its crown forever if it rests on its laurels, as competitors are catching up. Android phones made advances this year in displays, cameras, waterproofing and VR/AR.
In China, Apple is losing market share to local vendors such as Oppo, Vivo, Huawei and Xiaomi. The iPhone’s market share fell to 7% in China. Apple might need to localize its strategy to keep up in this market. Chinese firms typically make low-end smartphones, but Huawei and Xiaomi, among others, are aiming for the premium segment. The premium segment is the iPhone’s home turf.
Microsoft Corporation (NASDAQ:MSFT) appears to be making strides with its Surface PCs and laptops, which offer touchscreens. Some are saying that Microsoft is the new Apple — a company that is innovating and making bold moves.
Apple might be losing market share, but will this matter? Androids have held greater market share for years, but Apple continued to take most of the profits. A declining share for AAPL did not translate into lower profits.
Apple Stock Con: China Risks
China once served as a major engine of growth for Apple, but this year cracks emerged. Weakening economic conditions and saturation in China slowed Apple’s iPhone sales in the beginning of the year. China’s ruling Communist Party appears to be tightening its grip, and Apple, a channel for foreign ideas, fell under suspicion.