Apple (AAPL 0.04%) has underwhelmed investors this year. As of this writing, shares are down about 19% year to date. That compares with a gain of about 4% for the S&P 500 during the same time frame. The stock's underperformance has been driven by the company's disappointing growth. Apple's revenue in the first half of the year, for instance, grew just 4.4% year over year.
With the tech company's total annual revenue hovering at around the $400 million level since 2022, there are some concerns that the iPhone maker may be nearing its maximum global sales potential. But before you count Apple out, consider the following unique bull case for the stock. It might change your mind.
Image source: Getty Images.
All it would take is one successful new product
Apple's concentrated product line is primarily viewed as a risk for the company. For example, the fact that the iPhone accounts for about half of Apple's total sales means that any weakness in the key category will weigh heavily on the overall business. Adding to Apple's concentration risk, just three product categories -- iPhone, Mac, and iPad -- account for about two-thirds of the company's total annual sales. In addition, if you include the company's wearables, home, and accessories segment, primarily consisting of sales of Apple Watch and AirPods, in an assessment of Apple's product category concentration, just five product lines represent about three-fourths of total sales.
The remaining sales come from Apple's services segment, which is diversified across a range of services, has a higher profit margin, and is more predictable than hardware sales.
But if you flip the script, there's another way to look at this product concentration. Apple's powerful business model and its global and loyal customer base enable it to generate about $300 billion worth of product sales annually from just four product categories. Therefore, considering how much a single product category can move the needle for the company, a single successful new product would be a likely major tailwind for the company.
Indeed, this is exactly what Apple did with AirPods and Apple Watch. Thanks to the launch of these iconic and wildly popular devices, starting with the Apple Watch in 2015 and the AirPods in 2016, the company's wearables, home, and accessories segment now represents more than 9% of total sales. And, looking further back, the company did the same thing with the iPad when it was launched in 2010. Today, the iPad represents 7% of total sales.
All of this to say, the company's sales growth rates could materially accelerate if Apple sees success in a new product category.
The services flywheel
Strengthening this investment thesis for Apple even more, the analysis here arguably understates the impact of new product categories on the overall business. The reason is that every new product has a flywheel effect on other areas of the business, too. For instance, when a customer buys his or her first Apple Watch or iPad, it's likely to increase overall engagement with the Apple ecosystem, leading to higher services revenue, greater loyalty, and ultimately higher lifetime customer value.
Today, Apple is already venturing into new product categories that could morph into major revenue streams in the future. The most notable one is the company's foray into spatial computing with Vision Pro. Launched just last year, these new goggles mark a new era of spatial computing, Apple CEO Tim Cook said just before deliveries of the new device started. While the new product is still considered a niche item that most customers pass on, it shows that the company is willing to explore new areas that could become the next iPad, Apple Watch, or AirPods for the company. In addition, investors shouldn't rule out Vision Pro specifically as a potential future catalyst. While it's not a major driver for the company today, future iterations of the device could lead to a tipping point in customer utility.
With all of this said, Apple stock's price-to-earnings ratio of about 31 already seems to price in a return to higher growth rates at some point in the future. But this thesis at least helps strengthen the case for holding shares through this lull in growth.
Still, the risks are significant. For instance, it's possible Apple's sales growth rates will never return to robust high-single-digit rates. An unfortunate outcome like this could be caused by weakness in one of the company's major product categories or simply a failure to gain traction in any new categories. But even with these risks in mind, the overall risk-reward profile seems attractive enough to hold onto shares. The fact that the company has been able to grow as much as it has over the past decade with just a handful of product categories suggests that Apple will likely find another new category over the next decade to help the company return to strong growth again.
