After rallying much of 2023, major indexes like the S&P 500 and Nasdaq Composite have experienced a slight slump during August so far. Leading the way (in the wrong direction) is the world's most valuable public company, Apple (AAPL -0.68%), down over 10% since the beginning of August.
Double-digit percentage drops aren't ideal for current investors, but this pullback may be a good chance to begin loading up on the stock. If you have $500 available to invest, Apple is a compelling option considering its long-term prospects and dividend.
Slowing iPhone sales should be a temporary problem
There isn't usually too much to criticize about Apple's financials, but believe it or not, it's not immune from the impact of changing economic conditions and trends.
In its third quarter (ended July 1), Apple made $81.8 billion in revenue, down 1% year over year (YOY). The good news: That quarterly revenue is higher than most companies' yearly revenue (Wells Fargo, Pfizer, and Boeing, to name a few). The could-be-better news: Apple's had several consecutive quarters of negative YOY revenue growth.
Data by YCharts.
Much of Apple's lagging revenue growth can be attributed to slowing iPhone sales recently. The iPhone is Apple's foundation, accounting for more than 48% of its Q3 revenue. Unfortunately, iPhone sales were almost $1 billion less than in Q3 2022.
Slowing sales on a product that essentially carries the company's balance sheet isn't the most encouraging thing, but keeping a perspective on why is important. Smartphone sales, in general, have been decreasing as inflation has been putting extra pressure on consumers' pockets. In the first quarter of 2023, smartphone shipments globally dropped 14.6% YOY, according to IDC. Declines in the U.S. were better but still down 11.5% YOY.
Smartphone troubles should be turning the corner late into 2023 and heading into 2024, which should bode well for Apple and its iPhone sales.
Apple's services are beginning to handle their own weight
There's no doubt that Apple goes as the iPhone goes, but other subdivisions are beginning to handle their own, especially its services segment. Services are by far Apple's second-most-lucrative segment, bringing in $21.2 billion in Q3, but more encouraging is how much of Apple's total revenue it's beginning to account for.
| Time Period | Services Segment Revenue | Percentage of Total Revenue |
|---|---|---|
| FY 2019 | $46.2 billion | 18% |
| FY 2020 | $53.7 billion | 20% |
| FY 2021 | $68.4 billion | 19% |
| FY 2022 | $78.1 billion | 20% |
| Q3 2023 | $21.2 billion | 26% |
Data source: Apple quarterly filings. Percentages rounded to the nearest percent. FY = fiscal year.
The growth of Apple's services is important for a few reasons. First, regardless of how successful the iPhone is (arguably the most successful consumer product ever), having so much of your business rely on a single product isn't ideal.
Services also have much higher margins than physical products. For each piece of hardware Apple sells, it had to incur an additional cost to make it. Generally speaking, once initial costs happen, the only additional costs from services are maintenance, support, and occasional updates. That's largely why Apple's Q3 profits were up despite declining iPhone, Mac, and iPad sales.
Apple is still in the early stages of its services offerings, but it's picking up steam fast -- especially in financials and healthcare. Those are two sectors that Apple has been slowly but surely making its way into (think: Apple Card and Apple Watch capabilities), but at some point, you imagine the company will put the pedal to the metal and aggressively expand in those areas.
Don't let the valuation be a deterrent
You can call Apple's stock many things, but "cheap" isn't necessarily one of them. With a price-to-earnings ratio of just below 30, Apple is trading at a premium, even after its August decline. Still, long-term investors shouldn't harp too much on Apple's valuation, considering the company's growth potential.
While it's not seen as a dividend stock, Apple pays a $0.24 quarterly dividend. Its trailing 12-month yield is well below the S&P 500 average, but it's a true two-for-one when considering the growth potential in its stock price.
Sometimes it's as simple as, "Is this a company I feel comfortable holding onto for decades?" In my opinion, the answer should be an overwhelming yes for Apple. A $500 investment now could go a long way down the road.
