Among the tech sector's luminaries stands Apple (AAPL +0.63%), a well-regarded stock among many investors, including Warren Buffett. His Berkshire Hathaway owns a sizable chunk of Apple stock (over 900 million shares), but that strong endorsement alone doesn't justify an investment.
The potential to buy the stock at a discount does hold some sway. Apple's stock price hit a 52-week high of $182.94 on Jan. 4, but it has fallen since then along with the broader market due to macroeconomic fears such as inflation. The price is down almost 26% from that high. The current financial environment creates uncertainty, but now may actually be a great time for investors with an eye toward the long term to pick up shares.
But there are at least three other solid reasons why this business can weather the present economic storm and continue to be a solid investment over the long run.
NASDAQ: AAPL
Key Data Points
1. Apple keeps people coming back for its products
It's no surprise the company that became famous for ushering in the personal computer era and the iconic iPhone would generate the bulk of its income from these products. In its fiscal 2022 second quarter (ended March 26), Mac and iPhone products comprised over $60 billion of the company's $97.3 billion in sales.
The iPhone, in particular, is Apple's bread and butter. iPhone sales in the company's fiscal Q2 represented more than half of all revenue at $50.6 billion. This has been the case for years, and Apple's iPhone development efforts have what it takes to continue this growth.
Consumers are in the midst of transitioning to mobile phones that support new, more powerful 5G wireless networks. Apple released 5G-compatible iPhones in the fall of 2020, which helped propel fiscal 2021 iPhone sales to a 39% year-over-year increase after falling 3% in the prior fiscal year. The company is also releasing scaled-back, lower-priced models to go after segments of the market it had previously ignored.
Given rising inflation and threats of a recession, I wouldn't be surprised if iPhone purchases slowed in the short term when compared to fiscal 2021's blistering sales. But as consumer 5G adoption increases from 8% last year to an estimated 25% by 2025, so will iPhone purchases, ensuring Apple's bread and butter remains intact over the long run.
2. Apple is not just a hardware company
It's understandable to assume Apple will be hurt by inflation. Rising prices might force some consumers to hold off buying Apple's latest devices. But Apple isn't just a hardware company. For years, it quietly built a slew of software-as-a-service (SaaS) offerings that generate recurring revenue through subscriptions.
Apple's services segment encompasses its AppleCare warranty and repair program, digital payments, cloud storage, advertising products, and digital content, which includes music, movie, TV, and video game subscriptions. This division has seen steadily rising revenue over the years, going from $46.3 billion in fiscal 2019 to $68.4 billion in fiscal 2021.
The segment got a boost from advertising revenue when Apple changed its ad policies last year to bolster consumer privacy. Customers can now block third-party apps from targeting them with ads. Consequently, companies reliant on advertising, such as Facebook parent Meta Platforms, saw revenue from their iPhone apps dramatically decline. Meanwhile, Apple benefited as advertisers shifted budgets to its ad products.
Cloud subscriptions are another key contributor to services' sales growth. With our ever-increasing reliance on digital content, such as photos taken with mobile phones, consumers need a place to store that content. Apple's cloud provides a solution. Since we're unlikely to remove the hundreds, even thousands (in my case), of photos and other content uploaded to Apple's cloud, the company has a revenue stream resilient to macroeconomic challenges.
3. Apple has built a self-sustaining ecosystem
The third reason to invest in Apple is the ecosystem it built through a symbiosis of its products and services. A consumer buying the latest iPhone can leverage the convenience of Apple's cloud to automatically back up the phone's content or stream movies on a television connected to an Apple TV device.
This interplay between Apple's products and services increases a consumer's reliance on both, bolstering Apple's revenue through subscriptions between product purchases. This ecosystem will continue to expand, both through acquisitions -- for which Apple has purchased around 100 companies over the past few years -- and in-house research and development (R&D) efforts.
The company's relentless quest to strengthen its technology is one reason why Apple invests heavily in R&D, which represented about half of the company's operating expenses in fiscal Q2, and keeps so much cash on hand. The company exited fiscal Q2 with $28.1 billion in cash and equivalents.
Despite its strengths, Apple isn't immune to macroeconomic factors. Investors should expect some pain in the short term. Apple's fiscal third quarter could show a revenue hit due to the strong U.S. dollar since more than half its net sales come from outside the Americas.
But investors with an eye on the long term can wait for these macroeconomic storms to pass and, while waiting, can collect dividends from Apple stock. The dividend yield is a modest 0.65% at the time of this writing, but many tech stocks offer no dividends.
So while inflation, supply chain woes, and other macroeconomic factors may create a daunting picture in the near term, investors holding shares for the long run will be glad they picked up Apple stock.
