With top products like the iPhone and Apple Watch, Apple (AAPL 2.48%) has pretty much become a household name. The trillion-dollar company has an enormous audience worldwide, with fans eagerly awaiting the next product launch. This has helped the tech and consumer goods giant grow earnings over time.
These elements make Apple a great buy, but other points may weigh in favor of selling the stock. For example, Apple shares already climbed nearly 50% this year, so near-term performance potential may be limited. And the company recently reported declines in product revenue, which could spur questions about growth moving forward. So, right now, which way should you go -- should you buy, sell, or hold Apple stock? Let's find out.
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Apple's product revenue
Apple did indeed report a drop in product revenue in the most recent quarter -- it fell about 5% -- but it's important to understand why that happened. First, negative currency effect was a factor, and since this is a temporary external element, I don't see it as a problem for Apple's long-term growth.
Second, Apple faced a difficult comparison period for certain products: The Mac and the iPad posted unusually high sales in the same quarter last year due to pent-up demand. Earlier supply chain disruptions delayed product sales and pushed them all into that particular quarter, making it a very difficult quarter to beat. Again, this doesn't reflect lack of demand for Apple's products or a permanent weight on sales growth.
Of course, Apple's revenue may not grow at the same rate as a new, up-and-coming company's, but it offers investors a very respectable level of growth and innovation, along with elements that should help this growth continue and even accelerate. I'm talking about brand strength and the promise of Apple's services business.
We'll talk about brand strength first. Generally, Apple fans stick with the company's products, thanks to the power of the brand, and this has created a moat, or competitive advantage. This also leads to pricing power, or the ability to raise prices without losing the customer. At the same time, the strength of the brand continues to attract new customers -- in the recent quarter, half of Mac buyers were new to the item. All this offers visibility on future product revenue, and here, things are looking good. Mac and iPhone installs are at a record high, the company says.
Growth in Apple's services business
Now, a bit on the services business. This includes any of the potential services you may subscribe to as an Apple device user -- for example, cloud storage or digital content. The higher the install base, the more Apple's services business may grow, and that's exactly what's happening now.
In the quarter, services revenue climbed 16%, reaching a record high. And here's even more good news. Services are higher margin than products -- with a gross margin of about 70%, versus 36% for products -- and that means they can be more profitable for Apple. It's also important to note this revenue is recurrent. You don't buy an iPhone every day, but you may regularly pay for Apple services.
Finally, yes, Apple shares have advanced this year, but they still are trading at only 29 times forward earnings estimates, which is very reasonable for a growth stock that also offers a lot of stability -- including dividend payments.
An impressive track record
So, should you buy, sell, or hold Apple stock? Apple hasn't lost its luster and still is a terrific long-term buy. The company offers you a track record of growth, with several important financial metrics that have increased over time.
AAPL Revenue (Annual) data by YCharts
Meanwhile, Apple, thanks to more and more people using its devices, now has the subscriber base necessary to drive services revenue. This could lead to a whole new era of growth for the technology powerhouse, which in turn should drive the share price higher over time.
All this means that, even though Apple shares have gained this year, this top stock still has plenty of room to run -- in the near term and over the long term. So it's a great idea to buy the stock today, or hold if you're already a shareholder, and benefit from the many chapters to come in this exciting story.
