Apple (AAPL 2.48%), with a nearly $3 trillion market capitalization, has become the world's most valuable company. While that's an extraordinary achievement, it's important to look forward when evaluating a stock. This will require assessing the company's prospects and valuation before deciding whether you should buy, sell, or hold on to your Apple shares.
So, let's dive in.
Image source: Getty Images.
iPhone
The iPhone remains an important revenue driver. For the first nine months of fiscal 2023, which ended on July 1, iPhone sales accounted for 53% of Apple's sales.
But devices sales have slowed this year. In the most recent quarter, iPhone sales dropped by 2.4% to $39.7 billion. That's part of a broader industry trend that has affected the overall smartphone market.
Nonetheless, based on the number of shipments, Apple's market share has dropped this year. In the second calendar quarter, iPhone's share fell to 17% from 23% at the end of 2022, based on data from Counterpoint.
Apple will likely launch its latest iPhone version this month. Historically, this has been a boon to sales. Whether that happens this time remains to be seen, but since Apple relies on the product for more than half of its sales, it's imperative that sales don't disappoint.
Services
While the iPhone is important to Apple's sales and earnings, the company's results aren't entirely dependent on the device, of course. Its services include advertising, digital content (e.g., the App Store), cloud services, and payment services.
Services tend to have more recurring, predictable revenue than products. And it's a higher margin business. Last quarter, services had a gross margin of 70.5%, nearly double that of product sales.
These have been growing nicely. In the latest quarter, service sales were $21.2 billion, 8.2% higher than a year ago. With more than 2 billion active devices, Apple remains in a good position to continue growing this revenue source.
Rewarding shareholders
Even with sluggish iPhone sales, Apple has been a free-cash-flow (FCF) machine. In the first nine months of this fiscal year, FCF was $80.1 billion. The company spends the bulk of its FCF on dividends and share repurchases. These totaled $67.8 billion. Buying back its own shares has been a good use of capital. This fiscal year, it paid an average price of $153.70, about 20% below the current share price.
The board of directors has also consistently raised dividends; earlier this year it enacted a penny increase to $0.24. But the 0.5% dividend yield trails the S&P 500's 1.5%.
Valuation
Despite sluggish iPhone sales, Apple's stock has risen by an astonishing 46% in 2023, easily besting the S&P 500's 17.1%. Unfortunately, the stock's sharp increase means Apple's shares have become more expensive. Apple's stock sells at a price-to-sales ratio of nearly 8. That's up from around 5 at the start of the year.
Services have been doing well, but it's tough to buy shares at a richer valuation when iPhone sales have been slowing. Apple will also launch Vision Pro, a virtual reality/augmented reality headset. Initially selling at about $3,500, it has a high price point. It remains unclear how Apple's customers, which have been loyal, will react.
I would suggest holding the shares while keeping an eye on how things develop after Apple releases its new phone.
