Shares of Apple (AAPL -1.76%) have soared 51% over the past 12 months, easily outpacing the NASDAQ's 23% gain. However, the stock has gone nowhere over the past month despite reporting strong second quarter earnings in late April.
Therefore, some investors are likely wondering whether or not it's time to take profits. Let's take a look at the bearish and bullish arguments for Apple, and which one makes more sense.
Why some people are cashing in
The iPhone is Apple's greatest strength and its biggest liability. Last quarter, Apple's iPhone revenue rose 55% year over year and accounted for 69% of the company's top line. Apple controlled a fifth of the global smartphone market at the end of 2014, according to IDC -- an impressive feat considering that it only launched two new smartphones during the year.
However, the future of the iPhone depends heavily on the Chinese market, which accounted for 29% of Apple's top line last quarter. According to IDC, Apple toppled Xiaomi as the top smartphone in China in the first quarter of 2015, as shipments rose 62% annually to 14.5 million devices. But during that time, total smartphone shipments in China fell 4.3% to 103.2 million units. This slowdown means that Apple's growth in China could eventually hit a ceiling. If iPhone sales start slowing down in China, Apple stock will take a hit.
iPad revenue, which accounted for 9% of Apple's top line last quarter, fell 29% annually due to sluggish demand for tablets and cannibalization by the iPhone 6 Plus. As demand for the iPad dries up, Apple's dependence on the iPhone will increase.
That leads to the question of innovation. Without Steve Jobs, it's unclear if Apple can still launch disruptive, market defining products. Apple Watch got off to a strong start, but it frankly isn't that much more advanced than Samsung (NASDAQOTH: SSNLF) Gear or Android Wear devices.
Why you shouldn't take profits yet
Apple's top-heavy business model isn't ideal, but the company still has plenty of strengths.
Apple stock remains fundamentally cheap at 16 times trailing earnings. By comparison, the S&P 500 and NASDAQ 100 have respective P/E ratios of 21 and 23. Apple's revenue rose 27% and net profit grew 33% annually last quarter -- impressive figures for a company with a massive market capitalization of $735 billion.
Apple's forward annual dividend yield of 1.7% is slightly lower than the S&P 500's average yield of 1.9%, but it's still a respectable payout. Apple raised its dividends three times in the past -- 15.8% in 2013, 6.8% in 2014, and 10.6% in 2015. Over the past 12 months, Apple paid out $11.2 billion in dividends to shareholders, and bought back $33.3 billion in shares.
Paying dividends and buying back shares was a controversial idea, since Apple financed both with debt to avoid paying U.S. taxes on repatriated cash. However, Apple got a good deal on its own stock, which rose 34% since buybacks started in the beginning of fiscal 2013.
Other growth opportunities ahead
Apple also has three other ways to diversify its top line away from the iPhone.
The first is Mac sales, which rose 2% annually last quarter and accounted for nearly 10% of Apple's revenue. Between the fourth quarters of 2013 and 2014, Apple's share of the global PC market rose from 5.8% to 7.1%, making it the fifth largest PC maker in the world, according to IDC.
That growth is significant, since Apple dominates the market for "ultramobile premium" devices like the ultrathin MacBook and MacBook Air. Gartner estimates that the "ultramobile premium" share of the PC market will rise from 12% to 28% between 2014 and 2017.
The second is ecosystem growth. Apple's health-tracking platform HealthKit, mobile payments system Apple Pay, and smart home platform HomeKit all represent ways to tether iOS devices to bigger ecosystems. Apple's expansion in streaming media with iTunes Radio and Beats could help iAd, its fledgling advertising platform, grow.
Lastly, the Apple Watch could be a game-changer. IDC expects Apple to sell 15.9 million Apple Watches this year, which would only equal $11.2 billion in revenues based on its average preorder purchase price of $707. However, Generator Research estimates that the value of the smartwatch market will soar from $17.2 billion in 2015 to $154 billion by 2020. If Apple Watch maintains a steady market share in that market over the next five years, it could become a major source of revenue.
Patience pays off
As a longtime Apple shareholder, I don't plan to sell my shares anytime soon. Granted, Apple probably won't double from current prices, but its downside potential is limited by solid fundamentals. Meanwhile, rising dividends and buybacks will reward patient investors who have faith in Apple's business and brand appeal.