Apple's (AAPL +1.05%) business has come under scrutiny this year, with macroeconomic headwinds leading to repeated revenue declines. Then, on Oct. 16, Counterpoint Research revealed Apple is losing to Huawei in the Chinese smartphone market, with iPhone 15 sales down 4.5% in the country compared to last year's model.
Counterpoint partially attributed the sales slump to China's burdened economy, which is still struggling to rebound after COVID-19. However, the rise of Huawei and recent sanctions by the Chinese government could see Apple continue to lose market share in the country. Conversely, the iPhone 15 is looking like a massive success in the U.S., with analysts projecting double-digit year-over-year sales growth.
Apple's recent challenges in products are why it's crucial to keep a long-term perspective with tech stocks. The company remains the biggest name in consumer tech and is home to a highly profitable services business. The tech giant is unlikely to lose that dominance over the long term and has much to gain once economic headwinds subside, making now an excellent time to consider investing in its stock.
Here are two green flags for Apple's future.
1. Apple is more than iPhone sales
About 50% of Apple's total revenue is owed to its iPhone segment, so stockholders slightly panicked when the company reported a 2% year-over-year decline in smartphone sales in the third quarter of 2023. The tech giant's stock tumbled 9% since its earnings release at the start of August. However, Apple has become much more than its iPhone business and is steadily diversifying its revenue streams to lean less on product sales over the long term.
In 2019, the company made a major push into digital services, launching subscription-based platforms Apple TV+, Fitness+, Arcade, and News+, all in the same year. The success of these platforms has made Apple's services segment the second highest-earning part of its business, after the iPhone. Meanwhile, its rapid growth suggests it could overtake the company's smartphone segment one day.
In fiscal 2022, services revenue growth hit 14% year over year, double the iPhone's growth. Then in Q3 2023, services delivered an 8% rise in net sales, compared to the iPhone's decline of 2%.
Apple's larger focus on services is promising, considering the business' attractive profit margins. The digital platforms segment regularly hit profit margins of 70%, with the same metric for products hovering around 35%.
Alongside services, Apple has expanding ventures in artificial intelligence, virtual/augmented reality, and fintech, which all have the potential to lessen the company's dependency on the iPhone. Apple is on a promising growth trajectory, making the recent dip in its stock an attractive investment option.
2. Immense loyalty from consumers
Apple's expansion into more digital forms of business is gradually making it less vulnerable to economic headwinds. However, the company owes much of its dominance in tech to the massive popularity of its products and the loyalty they have garnered from consumers. Apple holds leading market shares in smartphones, headphones, tablets, and smartwatches, suggesting it has much to gain once the market rebounds.
The tech giant has strategically created an interconnected ecosystem for its devices, which promotes ease of use and makes consumers less likely to try out competing products. The advanced connectivity means an iPhone user is far more likely to buy a MacBook when shopping for a computer or an Apple Watch when in search of a smartwatch.
Connectivity and consistent quality have granted Apple almost unrivaled brand loyalty among shoppers. Consumer preference for its offerings has been most prevalent during an economic downturn, when the entire tech market suffered from reductions in spending.
In Q2 2023, U.S. smartphone shipments fell 24% year over year, with Samsung sales tumbling 37%. However, the same period saw Apple report a more moderate sales decline of 6%, which allowed its market share to grow from 52% to 55%.
NASDAQ: AAPL
Key Data Points
Apple has amassed a substantial user base on a global level, which is unlikely to dissipate any time soon. The company's iPhone business could lose out to Huawei in China in the coming years.
However, multiple emerging markets reported record revenue in Q3 2023. iPhone sales hit new highs in India, Indonesia, Mexico, the Philippines, Poland, Saudi Arabia, Turkey and the UAE. Meanwhile, more established markets such as France, the Netherlands, and Austria enjoyed record sales for the June quarter.
I wouldn't bet against Apple over the long term, despite recent economic hurdles. Its expansion outside of products has bolstered its earnings potential, with the popularity of its products likely to continue offering significant gains for many years.
