Year-to-date, Apple (NASDAQ:AAPL) stock has risen an impressive 54%. At the same time, it missed expectations and its revenue contracted almost 3% in FY 2023, similarly along with free cash flow and net income. Since 2021, growth has stalled, while operating expenses from R&D have increased, leading many to worry about the future of AAPL stock as R&D expenses grow faster than revenue.
Despite slowing growth, it trades at a P/E ratio of 30.9x compared to the S&Ps 25.24x, over a 22% premium. However, Apple has some key fundamentals that will likely see it continue to be a cash cow in the future.
AAPL Stock and Gen Z
First, it’s a fact that Apple has a firm grip on Gen Z, with 87% saying that they own an iPhone. This isn’t just true for the United States, it’s a trend that is spreading worldwide.
In South Korea, where the most common device is Samsung, only 23% of its population uses an iPhone. However, 52% of people 18-29 own an iPhone. This grew from 44% in just two years. Meanwhile, Samsung’s overall market share has shrunk from 44% to 45%. Globalization will attract more youth to Apple.
Services Are Impressive
Apple’s services segment has grown an impressive 16.3% YoY. Because the services segment is software and inherently high-margin, it has pushed Apple’s overall margin up from 41.8% in 2021 to 44.1% in 2023.
In this time, services have grown to comprise over 35% of the revenue compared to 31%. If this trend continues, margins will continue to improve.
Furthermore, the installed base has continued to grow, providing a steady stream of potential. Since 2018, the installed base has been growing at an average rate of 27% a year. Meanwhile, the percentage of subscribers per installed base has also increased, from roughly 0.18 subscribers per device to 0.5 subscribers per device.
In the future, AI could be a major boost to services revenue. Microsoft’s AI assistant could see $14 billion alone in revenue, with just a 10% take rate of 382 million users. With Apple having access to 2 billion devices, its planned AI rollout will see more usage and could be a major revenue driver.
Dividends and Buybacks
With Apple’s stability in generating cash flow and track record in raising dividends and buying back shares, the stock remains a good long-term investment.
Its 5-year dividend yield is 6.15%, and in the past decade, it has spent almost $600 billion in buying back stores, more than any other U.S. company.
Investors will be rewarded with dividends and buybacks due to the company’s cost control and solid fundamentals.
Valuation
The elephant in the room remains Apple’s valuation and a big reason many are bearish on Apple stock. Looking at its total enterprise value to revenue, it currently trades at 7.59x, just below its all-time high of 8.52x.
For people with a short time horizon, this might mean that Apple’s stock could be risky. The stock’s fundamentals are solid and the business is expected to continue growing with AI integration and attractive software margins.
In addition, Apple’s valuation has lifted as the threat of rising rates has dropped substantially, with inflation cooling. The favorable macro environment, AI applications, and improvement in margins justify Apple’s valuation.
Conclusion
Overall, Apple remains a powerhouse and the device of future generations. Though its valuation seems high, it’s not completely unreasonable. The late Warren Buffet famously advised to buy good businesses at a fair price, and Apple continues to be a good business worthy of holding long term.
Disclaimer: On the date of publication, Michael Que 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.
