The Nasdaq Composite Index has had a wonderful start to the year, rising 35%. This bounce-back is exactly what investors need after last year's 33% decline. Optimism is clearly permeating the market.
Amid the market's rise, tech stocks are doing well. For instance, Apple (AAPL -0.35%) is up 49% this year. And its market cap is hovering around the $3 trillion mark.
It might seem crazy to recommend such a massive business that's so widely followed as a solid investment right now. But I think it's a smart move if investors buy $5,000 worth of Apple stock and hold for the long term. Here's why.
Attractive characteristics
There are so many wonderful attributes about this company that's it hard to figure out where to start. First off, we can't ignore Apple's powerful brand. According to Interbrand, it's the most valuable brand in the world, estimated to be valued at $482 billion. I don't think this is a surprise to many people, as Apple is so ingrained in our society that almost everyone is familiar with the company.
Having a loyal customer base, which has contributed to the brand's strength, is surely part of the reason that Warren Buffett, through his conglomerate Berkshire Hathaway, has such a massive stake in the business. Look through the company's portfolio, and you'll see it's peppered with companies that have powerful brands.
Of course, a business can't develop such a dominant brand presence without selling superior products and services. With the iPhone, Apple has created arguably the single-greatest product in corporate history; the device generated more than half of the company's revenue in the fiscal 2023 second quarter (ended April 1). Other popular hardware products, like the MacBook, iPad, Watch, and AirPods, also see tremendous demand. In fact, Apple currently has more than 2 billion active devices worldwide. That's incredible.
Over the past few years, the Services segment, which includes Music, Pay, TV+, and iCloud, has gotten a lot of attention. This has turned into a high-margin, recurring, and fast-growing revenue stream for Apple. And it drives even more stickiness from customers by making the ecosystem stronger.
And we can't forget about the company's favorable financial position. As of April 1, Apple had $166 billion of cash, cash equivalents, and marketable securities on its balance sheet. And it generated $111 billion of free cash flow in fiscal 2022 (ended Sept. 24), a typical occurrence for the tech behemoth. Management has used this money printer to return lots of capital to shareholders in the form of stock repurchases and dividends.
Investors might wish that Apple would return even more capital in the form of more aggressive buybacks and higher dividends. But the amount of cash Apple has on its balance sheet creates some options for the business to continue investing in new growth opportunities. These opportunities -- like augmented and virtual reality, as well as a rumored autonomous vehicle -- could be financial boons for the company.
Things to think about
Unsurprisingly, Apple's massive size, with its $3 trillion market cap, might immediately turn some investors off. That's because naturally, the law of large numbers kicks in. And it's difficult to see a path to outsized revenue and earnings growth in the decades ahead.
The stock has undoubtedly been a huge winner, rising about 300% in the last five years. And it now sells at a price-to-earnings ratio of 33, which is expensive based on where the stock has traded in the last 10 years. Investors are rightfully concerned not just with Apple's scale, but its seemingly elevated valuation.
Even so, it's worth taking a closer look at this stock. Even though future returns likely won't resemble the past, Apple can still be a foundational holding in your portfolio. This looks like a safe investment with $5,000 of capital thanks to Apple's brand strength, outstanding product and service portfolio, and its superb financial profile.
