Although Apple's (AAPL -0.69%) business started in the personal computing market, that is no longer its driving force. Instead, iPhones have become the company's dominant product line, although its other offerings are still valuable.
However, investors also must realize that because the tech titan is highly concentrated in one product line, it could be a risk. So let's look at the iPhone's importance to Apple and see what that means for the stock.
iPhones didn't have a great holiday season, but there's a catch
In Apple's first quarter of fiscal 2023 (ended Dec. 31, 2022), iPhone sales made up 56% of the company's $117 billion in total revenue. The rest of the segments are somewhat spread out in terms of revenue contribution mix.
Image source: The Motley Fool.
With Apple's overall revenue falling 5.5% in Q1 (highlighted by iPhone's 8.2% decline), investors might wonder if it's time to reconsider owning shares, especially since the company's No. 1 product seemingly struggled. However, jumping to conclusions about this performance is a mistake.
iPhones saw a reduction in sales despite Apple launching its new iPhone 14 lineup, which could be a huge red flag. However, supply chain constraints prevented the company from keeping ample inventory levels of the new phone during the holiday season, causing lost sales. But just because Apple didn't have phones to sell in those two months doesn't mean those sales are lost forever. So when the company reports its Q2 results sometime in late April or early May, don't be surprised to see growth in this category due to the demand hangover.
While the other categories don't matter nearly as much to Apple's business, they aren't to be forgotten. The 10th-generation iPad was launched during Q1 and saw strong demand, with nearly 30% revenue growth. The Mac lineup offset it, thanks to a weak PC market.
One segment that can take the load off of the iPhone's shoulders is services. Services include the App Store, payment services, advertising, and a few others, but not Apple TV (which is captured in its wearables, home and accessories segment).
As Apple rolls out various products to ensure its customers utilize its ecosystem for nearly every facet of their lives, this segment should continue to grow. Furthermore, it's less dependent on the strength of the consumer, as many of these products are subscription based. .
With iPhone still being the top dog within the company, is there anything investors need to worry about?
Apple's stock presents more of a risk than its products
If you've bought a smartphone lately, it's evident that performance gains are becoming less impressive with each generation. Still, these products can demand a premium price, which defies the usual trend of technology costs.
Think of the price of a TV. It wasn't uncommon to pay several thousand dollars for an average flat-screen TV a few years ago. Now, you can purchase one for a couple of hundred dollars. This could be a significant risk if smartphones see a similar adoption curve because Apple may lose pricing power.
One key factor for iPhones is the brand power Apple has built. This manifests in multiple ways: Green text messages from non-iPhone users, iPhones being status symbols, and how the company doesn't allow bad guys in media to use its products. It's unlikely anything will happen to its brand, but it is another consideration as a risk should something go wrong.
I don't think either presents much risk to Apple, but its stock valuation might.
AAPL PE Ratio data by YCharts
At 25 times earnings, Apple is valued at a premium. Couple that with its shrinking revenue, and it is a high price to pay for the shares. If you're looking to take a position in Apple's stock, you may want to wait to see how iPhone demand shakes out in Q2, because if the delayed sales don't come through, the shares could face some pressure.
However, Apple remains one of the best-managed tech giants, and its industry dominance paints a bright future picture. So while it may not be the most opportune time to get into the stock, investors shouldn't lose track of this one.
