As fears about the coronavirus outbreak's impact on Apple's (AAPL 0.71%) sales and operations in China seem to be fading into the background, shares of the tech giant have been creeping higher. The stock wrapped up last Friday trading at about $325, near an all-time achieved in January on the heels of the company's blowout fiscal first-quarter results. This recent uptick in Apple's share price extends a monstrous run for the stock. Shares have nearly doubled over the past twelve months, rising more than 90%.
With the tech stock performing so well, many Apple shareholders are likely wondering whether or not they should continue holding shares or take profits. Further, investors interested in buying the stock may be debating whether they've missed out entirely.
Is Apple stock a buy, sell, or hold?
Despite the stock's soaring price recently, shares of the tech giant remain compelling.
Apple CEO Tim Cook. Image source: Apple.
iPhone revenue growth returns
Though Apple stock is certainly trading at a much steeper valuation than it was just a few months ago, the story has changed. In fact, it's arguable that the company's recent fiscal first-quarter results provided enough reason for investors to significantly increase their fair value estimates for the stock.
One major issue weighing on Apple's financial results in fiscal 2019 was declining revenue in the tech company's largest segment: iPhone. Accounting for 55% of total revenue during the year, you can bet this product segment's headwinds negatively impacted financial results. Revenue fell 2% year over year in fiscal 2019 and earnings per share was about flat -- not the sort of performance you would expect from a stock that currently trades at nearly 26 times earnings.
But in Apple's first quarter of fiscal 2020, following the launch of the company's new iPhone 11, iPhone 11 Pro, and iPhone 11 Pro Max, the tech company proved to investors that a 14% year-over-year decline in fiscal 2019 iPhone revenue wasn't the beginning of a sustained downward trend for the important product after all. iPhone revenue rebounded and returned to growth during the period, highlighting the product segment's resilience.
Indeed, fiscal Q1 numbers show a thriving iPhone business. Total smartphone revenue rose 8% year over year during the period. Highlighting how well the company's newest iPhones are selling, Apple management said in its earnings call that latest models fueled the segment's growth during the quarter. "iPhone 11 was our top selling model every week during the December quarter, and the three new models were our three most popular iPhones," said Apple CEO Tim Cook.
With Apple's iPhone business not only holding its own, but also growing nicely, the important segment still could help driving meaningful earnings growth in the coming years.
Next-generation catalysts
Of course, also propelling Apple's business are its two fastest-growing segments: services and wearables, home, and accessories. Together, these segments accounted for 22% of Apple's fiscal 2019 revenue, and they're growing at impressive rates.
Services -- Apple's second-largest segment after iPhone -- saw revenue jump 16% year over year in fiscal 2019. The segment, which generates sales from digital services like the App Store, Apple Music, Apple Pay, iCloud, and AppleCare, continues to see strong momentum. In fiscal Q1, services revenue rose 17% year over year. Further, strength in the segment is broad-based, driven by double-digit growth in all five of Apple's geographic segments.
Apple's wearables, home, and accessories revenue grew 41% year over year in fiscal 2019 and accounted for $24.5 billion of the company's $260 billion in total revenue during the period. The segment continues to grow rapidly in fiscal 2020, with sales rising 37% year over year in Q1. Revenue from wearables specifically, or Apple Watch, AirPods, and Beats products, soared 44% year over year during the period.
These segments look poised to help drive growth for Apple for years to come as the tech company monetizes its installed base of 1.5 billion active devices with services and as Apple benefits from a fast-growing wearables market.
High shareholder yield
Another reason Apple shares remain compelling -- even as they approach $330 -- is the stock's shareholder yield.
Investors often consider dividend yield yet still fail to fully appreciate a company's ability to return capital to shareholders since they are overlooking share repurchases. Shareholder yield considers both a company's annual dividends and share repurchases as a percentage of a stock price, giving investors a better picture of how much capital is being returned to shareholders both directly through dividends and indirectly through buybacks.
Since Apple's capital return program is so heavily weighted toward share repurchases, shareholder yield is a key metric for investors interested in the stock to consider. the tech giant's shareholder yield comes out to an impressive 6.5%. In other words, the combined value of Apple's annual dividend payments and share repurchases is approximately $93 billion; as a percentage of the company's $1.42 trillion market cap, this comes out to about 6.5%. So with its capital return program alone, Apple is building shareholder value at a rate equal to 6.5% of its market capitalization annually.
Earnings growth
Fortunately, Apple shareholders don't have to rely entirely on the company's dividend and share repurchases as a means to per-share intrinsic value growth in the coming years. A combination of the company's robust iPhone business and its fast-growing services and wearables segments should lead to meaningful earnings growth as well. To this end, Apple's earnings per share in its first quarter of fiscal 2020 rose 19% to a record $4.99, highlighting how the company can still grow earnings rapidly.
And for what it's worth, analysts have a rosy outlook for future earnings growth. On average, analysts expect Apple's earnings per share to grow by 12% annually over the next five years.
Considering all these factors, it becomes clear that Apple's business boasts impressive momentum despite its massive size.
Valuation
Apple stock may not be the great buy it was last year. This is particularly evident by a recent run-up in the stock's price-to-earnings ratio -- from below 17 last June to nearly 26 today. But a 26 P/E for Apple stock is fair given the durability of its iPhone business and rapid growth in services and wearables.
In addition, a closer look at Apple's services business' profitability strengthens the case for the stock's premium valuation today. The segment's 18% share of revenue understates how integral the nicely growing business has become to Apple's overall business. Investors should realize that Apple has a higher gross profit margin on services than it does on its hardware revenue, giving service an outsize impact on profitability. Services accounted for 30% of fiscal 2019 gross profit -- and this figure should only grow. This is good news since services is growing faster than Apple's overall hardware revenue.
Viewing this high-margin, fast-growing segment next Apple's soaring growth in wearables and its resilient iPhone business and it's clear why Apple trades at 26 times earnings.
Of course, there are risks to buying Apple just like there are risks to buying any investment. Since shares certainly aren't cheap, investors in Apple stock may have to keep a closer eye on the company to ensure that iPhone sales remain strong and Apple's next-generation catalysts continue growing rapidly. In addition, unforeseen challenges could arise, particularly as it relates to the company's global supply chain or its competitive environment.
But in light of the information investors have available today, shares look attractive for those willing to hold for the long haul.
