Apple (AAPL -1.72%) is one of the most popular businesses globally and has no shortage of bulls advocating for it or bears deriding Apple stock. That's a healthy feature of adequately functioning financial markets. For every seller, there needs to be a buyer. Otherwise, those who wanted to sell could not offload their shares, and those who wanted to buy would not have anything to buy.
Typically, both sides have valid reasons (at least to them) for taking the positions they take. With that in mind, let's consider the bull and bear case for Apple stock.
The bull case for Apple
Apple has demonstrated that it can create innovative products and services. The company has built this capability over decades of tinkering with technologies and innovations to develop some of the most customer-friendly products consumers can buy. Ease of use is undoubtedly a big reason why so many consumers have adopted Apple's products, starting with Mac computers, then iPods, then iPhones and iPads -- the list goes on.
Apple has parlayed its product development success into a robust supplementary services business. As of its most recent quarter (ended March 26), Apple's services business made up 20% of sales. The continued growth of this segment is positive for Apple because this segment of the business delivers a gross profit margin of 72.6%, compared to a gross profit margin of 36.4% for the products segment.
Speaking of profits, Apple has plenty to boast about. From 2014 to 2021, Apple has increased its operating income from $52.5 billion to $108.9 billion. It's a Herculean feat to generate $50 billion in operating income; Apple doubled that figure in the last seven years.
Finally, the bull case for Apple includes untapped opportunities, such as self-driving electric vehicles. According to Bloomberg, Apple is working on plans to launch a fully autonomous self-driving car as early as 2025. The product could be a game-changer and reward investors handsomely if successful.
The bear argument against Apple
The bears will highlight that Apple is still essentially an iPhone business, despite all the wonderful things about the company mentioned above. In the six months that ended March 26, the iPhone accounted for $122 billion of the $221 billion in Apple's overall revenue. What's more, the iPhone is responsible for several of the company's other products that may not be as prominent without the iPhone.
That argument is valid. A meaningful part of Apple's services revenue comes from advertising sales. Alphabet reportedly is willing to pay Apple $12 billion per year to be the default search engine on, among other products, the iPhone. If the iPhone were not so dominant, it could not command such fees. That certainly takes away from the narrative of a diversified business with multiple engines for revenue and profit growth.
Finally, the bears will point to Apple's already sky-high valuation as a reason against investing in the stock. As of this writing, Apple boasted a market capitalization of $2.4 trillion. It goes back and forth with Saudi Aramco over who gets the title of the most valuable public company on the planet. There is only so much room to go higher with a price already so elevated. Looking at it another way, Apple is trading at a price-to-earnings and price-to-free cash flow of 23 and 24, respectively, which are historically at the higher end of their ranges.
Overall, the bull and bear cases each make good points about where Apple stock goes from here. Personally, I fall in the bull camp. For me, the rise in the services business and the potential for innovations justify the premium valuation.