Apple (NASDAQ:AAPL) stock has been looking a bit vulnerable, but not many tech stocks aren’t at the moment. The company is fresh off its Worldwide Developer conference (WWDC) event, where it announced iOS 16, new MacBooks and others. Yet shares remain unconvinced, with AAPL stock currently 27% below its all-time high.
The truth is, Apple’s annual WWDC event is far from a make-or-break situation when it comes to owning the stock. Market participants can trade around the event, but investors should not base their case on it.
The event is simple. It’s where Apple unveils its new operating systems and sometimes drops a new product refresh. It’s not meant to be a huge catalyst for the stock, although it can be at times when it has to do with its Services unit, payments or something else that spurs new growth.
The reality is that Apple is a stock to own — regardless of its WWDC event. Here’s why.
| Ticker | Company | Price |
| AAPL | Apple | $132.30 |
The Services Business Is “Moving the Needle”
When it comes to big companies like Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and especially Apple, critics like to explain how product ABC or XYZ “won’t move the needle.” That’s to say, as these companies have become so large, new products really are unlikely to meaningfully change the story for the company — at first.
That’s not to say Apple shouldn’t make AirPods or the Apple Watch. However, they pale in comparison to what Services has become.
In the early days of Services, Apple bears spun this enormous catalyst as a negative. Because Apple generated so much revenue from iPhone, iPads, Macs and other hardware, they thought this Services revenue was certain not to generate anything of substance.
The bears have been wrong on virtually all accounts — but particularly when it came to margins.
Last quarter, Services revenue topped $19.8 billion. That’s significant in itself, representing about 20% of Apple’s total revenue. But it’s the profitability that separates Services from Apple’s Products business.
Apple’s Products business sports gross margin of 36.3%, which isn’t bad for a hardware business. However, the Services unit weighs in with a whopping 72.6% gross margin — double the Products gross margin. While Services may make up one-fifth of total revenue, it makes up one-third of gross profit.
The bears’ latest argument has become valuation. However, the Services unit can also fight back against that argument. Last quarter, Products revenue grew 6.5% year over year, while Services grew 17.2%. Services is twice as profitable as Products and is growing revenue almost three times as fast.
As that relates to valuation, the margin and growth of Services justifies a higher premium for AAPL stock. That’s exactly how and why the company reached a $3 trillion valuation earlier this year.
Does That Mean AAPL Stock Won’t Fall Further?
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While Services is now a crown jewel at Apple — joining its iPhone and other money-makers — it does not mean AAPL stock will be spared in the stock market decline. We’re currently engulfed in a bear market and that means logic can go out the window — long-term positives are ignored due to short-term fears.
Inflation, supply chain problems, geopolitical issues and a hawkish Federal Reserve are all issues for the market at the moment. These situations can improve, but that may take time, and all the while, stocks are vulnerable.
Apple may be of the higher-quality holdings out there, but that doesn’t mean it won’t get hit with the rest of the market.
When we look at the valuation — under 23 times this year’s earnings estimate — it’s not that bad for what we’re getting. Admittedly, analysts only expect mid-single-digit revenue growth this year and just under 10% earnings growth in 2023. Still, at a time where the world seems to be falling apart, Apple’s still growing and its most profitable business segment is growing even faster.
Further, it has a fortress balance sheet and two constant buyers: Itself and Warren Buffett.
Apple recently announced a renewed $90 billion buyback plan, while Buffett buys every dip he can.
As for the chart, let’s see if the stock can reclaim the key $150 mark. That’s the Q1 low and if reclaimed, it could put more upside in play.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
