Apple (AAPL -1.22%) has been a resilient investment for long-term investors. It generated a total return of about 790% over the past 10 years, which crushed the S&P 500's total return of roughly 280%.
That growth was initially driven by robust sales of iPhones, iPads, and Macs. However, Apple continued to launch new products -- including the Apple Watch, AirPods, and HomePod -- while expanding its software ecosystem with sticky services like Apple Pay, Apple Music, Apple TV+, and Apple Arcade. Its App Store also became a vital platform for mobile developers.
image source: Apple.
Today, Apple is one of the world's most valuable companies, with a market capitalization of nearly $2.7 trillion. It's a core holding for Warren Buffett's Berkshire Hathaway and countless investment funds and is often touted as an evergreen tech stock for retail investors.
But should investors still buy shares of Apple as inflation, higher interest rates, and other macro headwinds rattle the broader markets? Let's take a fresh look at the bear and bull cases to find out.
What the bears will tell you about Apple
The most common complaint about Apple is its overwhelming dependence on the iPhone, which accounted for 52% of its sales in fiscal 2021.
Apple's iPhone sales jumped 39% to $191.97 billion last year as it launched its first family of 5G devices, but it faces slower growth in 2022 as it laps those upgrades. The ongoing chip shortage, supply chain issues, and the recent resurgence of COVID-19 cases in China -- which resulted in the temporary shutdown of its top contract manufacturer Foxconn -- will exacerbate those difficult year-over-year comparisons.
The Russo-Ukrainian war prompted Apple to suspend its operations in Russia, but the impact on its sales should be minimal.
But similar tensions have also been brewing for decades between mainland China and Taiwan, two of the main markets in the Greater China region, which accounted for 19% of Apple's sales in 2021. Foxconn is also based in Taiwan, but it operates most of its manufacturing plants in China. If a military conflict ever erupts between mainland China and Taiwan, Apple's entire supply chain would be disrupted and its consumer sales would plummet.
Apple is gradually entering newer markets, like mixed reality and connected vehicles, to diversify its business and expand its ecosystem. But it has limited experience in these markets, and it could struggle to compete against entrenched incumbents like Meta Platforms.
Analysts expect Apple's revenue and earnings to grow 8% and 10%, respectively, in fiscal 2022. Those growth rates are stable, but the bears believe its forward price-to-earnings ratio of 28 is too high.
Alphabet, which is expected to generate stronger revenue growth but weaker earnings growth than Apple this year, trades at 24 times forward earnings. Meta, which faces an earnings decline this year, has a forward P/E ratio of just 16.
What the bulls will tell you about Apple
The bulls claim Apple deserves a higher multiple because it's a high-quality company. It's consistently bounced back from previous economic downturns, and its luxury appeal and brand loyalty are practically unmatched.
Last October, a survey by Consumer Intelligence Research Partners found that 90% of iPhone owners planned to stick with Apple. That loyalty, which is reinforced by Apple's prisoner-taking ecosystem of services, should give it a captive market for its upcoming mixed-reality devices while paving the way for the launch of its long-rumored electric vehicle. That high loyalty rate also indicates that Apple's iPhone shipments won't abruptly dry up.
Apple's services business, which generated 19% of its revenue in 2021, also continues to grow at an impressive rate. It ended the first quarter of fiscal 2022 with a whopping 785 million paid subscriptions across all of its services -- which represented an 165 million increase over the past 12 months. The expansion of that ecosystem could reduce Apple's dependence on hardware sales, enable it to disrupt multiple markets -- including fintech, streaming media, and gaming services -- and widen its moat against Alphabet's Google, Amazon, and other tech giants.
Apple ended the first quarter with $203 billion in cash, cash equivalents, and marketable securities. That massive cash pile gives it plenty of room to expand its business with acquisitions. It's also reduced its share count by 38% over the past decade with disciplined, well-timed buybacks.
As for China, the actual risk of a military conflict with Taiwan remains very low because their economies are tightly intertwined. Invading Taiwan would likely crash China's own economy while incurring devastating sanctions -- so the risks clearly outweigh the potential rewards.
Why I'm still bullish on Apple
Apple accounts for 8% of my portfolio and is my second-largest holding after Amazon. I'm still bullish on Apple because it generates stable growth, has a bulletproof balance sheet, and still has plenty of ways to expand its business. Its near-term gains might be limited in this challenging market, but I believe the bulls will easily crush the bears over the long term.
