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Why You're Smart to Buy Apple Stock

By Royston Yang - Feb 12, 2020 at 9:05AM

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The smartphone giant continues to shine.

Investors who have owned Apple (AAPL 0.00%) stock over the past decade have been amply rewarded, as its shares are up about 1,000% over that time frame. The iconic smartphone company has been at the forefront of the technological era, and its innovative culture and visionary products have captured the hearts and minds of many consumers.

Smartphones are now a ubiquitous part of life, and many may not recall that Apple was a pioneer in this field, releasing its very first iPhone back in January 2007. Apple literally created a whole new industry from scratch through its iPhone, inviting a slew of other companies to mimic its features. However, none have come close to building up the same level of brand loyalty and status as Apple has, as well as the large base of consumers who regularly access Apple's app store to both write and download programs.

Here are some reasons why Apple will continue to prove to be a great investment and growth stock.

A woman holding a smartphone

Image source: Getty Images.

A sparkling set of earnings

Apple continued to demonstrate consistent growth in its recent quarterly report. Sales improved by 8.9% year over year while net income rose 11.4%, but it was the nature of the revenue growth that should get investors excited.

iPhones continued to represent the bulk of total revenue, at around 61%, and revenue for this product grew 7.6% year over year. This was an encouraging reversal from four consecutive quarters of year-over-year declining iPhone sales. Year-over-year declines for Q1 through Q3 2019 were of a low to mid-teens percentage, but this decelerated to a decline of 9.2% year-over-year in Q4 2019. Apple's new iPhone 11 rekindled demand in many countries as new features and a better camera function boosted its popularity. Hopes are high that this momentum can continue.

Though revenue from Macs and iPads fell year over year, these product categories constitute a smaller portion of overall revenue, at just 7.8% and 6.5%, respectively, in the most recent quarter. Overall gross margin grew from 38% to 38.4% as more of Apple's revenue shifted toward services, a category that includes subscription-based content such as streaming services for Apple Music and Apple TV+, which offers customers exclusive content. The company is on track to double FY 2016's services revenue in FY 2020. If this growth trend continues, investors should be able to witness continued gross margin expansion over time.

A shift toward wearables and services

Apple's Wearables Numbers

Source: Apple's Quarterly 10-Q Filings; Author's Compilation

What's interesting, though, is the sustained growth in the wearables, Home, and accessories segment. The graph above shows the revenue trend for this segment, and it has grown strongly over the last nine quarters to hit $10 billion in Q1 2020. This segment also broke the double-digit mark in terms of revenue mix, making up 10.9% of the quarter's revenue. Note that just eight quarters ago, the segment had posted sales of $5.5 billion, so this means that revenue has almost doubled since then. The wearables, Home, and accessories segment consists of items such as AirPods and the Apple Watch, and the company only started reporting it as a separate segment in Q1 FY 2018 as its revenue contribution started becoming more significant.  

The services segment is interesting for investors as it commands a much higher gross margin than the products division, at 64.4% versus 34.2%. What's more, the gross margin is rising for services, up 1.6 percentage points year over year in the most recent quarter, as compared to a slight decline of 0.1 percentage points for products.

Apple's strategy is to continue to deliver and develop great products such as AirPods, Apple Watches, and iPhones, but it's also pivoting toward offering more services to earn recurring revenues and enjoy higher gross margins. This two-pronged approach is powerful as it continually brings customers back for better products while signing them on to sticky services, creating a positive loop that reinforces loyalty.

In a November write-up on Apple, I mentioned why I thought Apple was still a buy despite a slight earnings drop in the previous quarter: strong growth in wearables, the services segment breaking records, and opportunities in healthcare for the new Apple Watch 5. This quarter's results have proven that the company is moving in the right direction. Though growth may not always be smooth, it's the long-term trajectory that matters.

Newly launched services

Apple has continued to roll out a broad range of services, and three of the most promising ones are Apple TV+, Apple News, and Apple Pay. CFO Luca Maestri said on the earnings call with analysts that the company had hit an all-time high of over 480 million paid subscriptions.

Apple TV+ was launched last year and contains exclusive content for subscribers, while Apple News has begun to draw 100 million monthly active users across the U.S., the UK, and Canada. We don't know how many Apple TV+ subscribers are paying (vs. in a free trial), but the service is expected to contribute more in the future. Apple Pay's transactions more than doubled to a run rate of 15 billion per year, while extending its capabilities to include payments for transportation (i.e. buses and rail) in cities such as London, Shenzhen, and Guangzhou.

A smart choice

While Apple is not trading at cheap valuations any longer, at around 25 times earnings, the company has managed to hit all the right notes in gunning for growth. With new all-time records being broken in terms of sales, profits, and user base, there is a lot to look forward to in the coming months and years.

Investors would indeed be making a smart choice to purchase Apple stock. Growth seems to have returned for iPhones, while both the services segment and the segment that includes wearables are posting encouraging growth. Gross margins look set to improve further and executives are optimistic about growth.

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