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Would Apple Hold Up Well in a Recession?

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The tech giant has grown into the largest U.S. company, but what would happen if the economy went sour?

Apple (AAPL -0.91%) is a dominant force in consumer electronics and is just shy of becoming the first $3 trillion company in the U.S. stock market. However, with inflation running high and the threat of a COVID-19 surge, how would Apple perform if the economy were to cool off? In this Fool Live clip, recorded on Dec. 6, contributors Matt Frankel, Toby Bordelon, and Danny Vena discuss their thoughts on the tech giant.

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Matt Frankel: We all know Apple. I get the fears -- that Apple is a big, highly valued company. It trades for, I think over eight times sales, which for a consumer products company of that size is lot. Apple, its biggest revenue driver is iPhones. It made about 47% of its revenue from iPhone sales in the most recent quarter. Just to give you the rest of the breakdown, 11% came from Mac sales, 10% from iPads, 11% from wearables and accessories, and 22% of its revenue came from services.

Apple, I like because it's a very sticky ecosystem that people will continue to participate in no matter what, especially that services business, which is not only the second largest single-source of revenue in there, but it's growing rapidly. That's a sticky source of revenue and it's a recurring source of revenue no matter what the economy is doing. If we see a 2008, 2009 recession, my Apple Music bill is still going to be paid every month. I'm still going to upgrade my phone when my children inevitably break my screen.

I'm still going to get my wife the newest Apple Watch for Christmas. It's a sticky ecosystem, and if you have one product, they got you in their ecosystem and you're just going to keep going. As far as consumer products go, it's a very recession-resistant business, which is remarkable being at how much pricing power Apple has on its products. Apple has a 25% net margin, which is almost unheard of for a company like it, where the product mix like this. They have a great pricing power, high margins.

A recession would have to be really bad for Apple's earnings to be in the red. They return capital to shareholders aggressively, they spent $86 billion on share repurchases over the past four quarters. Eighty-six billion, that's bigger than the market capital of 30 companies. What can you say about Apple? I am curious to see why you guys ranked it so low.

Danny Vena: I'll start here. I rated mine six [out of 10 large-cap stocks]. Again, a lot of this has to do with the fact that Apple is going to be volatile. The thing with Apple stock is a lot of Apple's products are high-end, and those high-end products tend to take a hit a little bit in uncertain economic times. I agree with everything that you just said. As far as returning capital to shareholders, their dividend is up 136% since they restarted returning capital to shareholders in 2012.

A lot of their recurring revenue now with the services is going to hold up much better than just sales of Apple's high-end products during a recession. Again, this is a case of what's the worst out of the best eight stocks that we can think of to hold in a recession. I rated Apple just a little bit below the bottom of the pack. But again, none of these stocks are ones that I would sell during a downturn. Toby?

Toby Bordelon: Yeah. For me, what was Apple for me, in number seven. Wasn't super high on this. But again, as I said before, just marginal, especially toward the bottom of the list. I think I was just more concerned about whether people would pay the escalating prices we've seen for some of these devices, specialty iPhone. Also, honestly, I'll say this is one of the list is probably the company I know least about. I mean, I'm very familiar with it, but I'm not as deep into the nitty-gritty of the business. Some of the others. That I just gave me some pause, like I wasn't quite sure.

I think that's one thing that's takeaway, like if you're not quite sure, it's OK to say this is not a company I want to load up on or heavily weigh. They have a reputation as a premium provider of premium products at premium prices. I wonder if that premium price is going to be an issue for some people if we get into recession. But it doesn't seem to have been so far. For whatever reason, this is a company people are willing to pay the price for their products. I would not be super concerned about it, definitely like Danny, I don't think it's one you go out and sell. I think that would be a huge mistake.

Vena: Even if you look at during last year's recession, even though their growth decelerated significantly, they were still able to grow revenue year-over-year over the course of the year during last year's flash crash recession.

Daniel Vena owns Apple. Matthew Frankel, CFP® owns Apple and has the following options: short January 2022 $140 calls on Apple and short November 2021 $140 calls on Apple. Toby Bordelon owns Apple. The Motley Fool owns and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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