Every few years, investors start to turn on tech giant Apple (NASDAQ:AAPL) as worries surface about the firm’s ability to continue to innovate and whether the firm’s iPhone sales will continue to bring in the kind of growth they’ve become accustomed to.
The firm’s most recent earnings results quashed the most recent wave of AAPL stock skepticism and took the stock from $190 per share to nearly $210 per share in a matter of days. However, now that the firm has a staggering market cap of $1 trillion, many are questioning if the stock is worth holding on to.
Although I’ll admit such a massive market cap is a little bit intimidating, Apple’s long-term growth story is too strong to pass up. The firm has proven over and over that its brand strength and customer loyalty are a major asset that investors shouldn’t overlook. Here are four reasons why investors should still be bullish on AAPL stock.
One of the major concerns that investors have about AAPL stock is the fact that iPhone sales still make up about 60% of the firm’s overall revenue. That heavy reliance on moving new iPhones is understandably concerning for investors, and that’s one of the reasons that AAPL stock doesn’t trade at a massive premium to its peers.
There are two reasons the company’s reliance on iPhone revenue shouldn’t scare you away from AAPL stock. First, the firm has been able to successfully take its pricing plans up to the next tier with the iPhone X. Its upcoming 2018 launch is expected to be a big one that will further encourage users to upgrade.
Apple’s customers are nothing if not loyal, and because switching costs are high once you tie yourself into the Apple ecosystem, AAPL users tend to buy new iPhones rather than shopping around. iPhone sales show that people are still upgrading, but there are quite a few iPhone 6 and 6S users who are waiting for the 2018 launch to upgrade.
Services Are Key
Secondly, and more importantly, Apple won’t just be an iPhone business forever. The company’s services sector has been growing rapidly, and that’s the future that long-term investors should be looking forward to.
This year Apple’s services arm looks likely to easily make it above $37 billion by the end of the year, which would put the company firmly on track to meet CEO Tim Cook’s goal of getting service revenue up to $52 billion by the end of 2020.
While growing the services arm is important because it reduces the firm’s reliance on just one product, it’s also a big deal because it makes the Apple value proposition that much more compelling.
The fact that Apple is starting to offer subscription-based services that its customers are responding to makes the firm’s moat even wider because it ties Apple customers in to the company’s ecosystem even further.
It’s also worth noting that although there are some concerns about Apple having saturated the North-American market, the firm has growth opportunities further afield — namely in China. The Chinese middle class is growing exponentially, and their disposable income is rising as well.
AAPL’s Q3 results proved that the firm’s return to growth in China was continuing despite worries about rising tension between Washington and Beijing. Rumors that the Chinese may eventually start to boycott Apple have weighed on AAPL stock recently, but the fact that Apple is one of the nation’s largest employers means drastic action against the firm is unlikely.
So although Apple has already reached an impressive market cap, I think the stock is still worth holding onto because the company’s growth runway looks promising well into the future.
However, you can’t talk about the value of owning Apple stock without mentioning the firm’s shareholder-friendly attitude. Apple’s huge cash coffers give the firm plenty of room to pay out dividends and repurchase shares. Also the firm’s healthy free cash flow suggests that the company will continue to do so for the foreseeable future.
Bottom Line on AAPL Stock
Apple may not be innovating like it was in the days when the iPod and iPhone were turning heads, but the company has set itself up for long-term success by building a brand that people tie themselves to, and that’s just as valuable.
Right now iPhone sales look likely to continue delivering strong growth, giving the firm time to grow its services arm and cut down its dependence on the devices. All of that plus a healthy dividend yield with likely increases in the future makes AAPL a great stock to buy and hold.
As of this writing Laura Hoy was long AAPL.