Investors have a lot to celebrate this year, with the S&P500 Win 20%. While it’s nice to receive high returns, it’s also a good time to take a closer look at your investments in the run-up to the new year.
Apple‘S (NASDAQ: AAPL) shares have underperformed the market by 2 percentage points since the start of the year, up 18.3%. However, the company has had great success in the past and rewarded shareholders handsomely. After all, the company has a market cap of $3.5 trillion, one of the few to cross the trillion-dollar threshold.
Can Apple Stocks Regain Their Market Beating? The answer lies in examining the long-term prospects and valuation of the company.
Can a new phone revive sales growth?
Apple’s iPhone accounts for a large portion of the company’s revenue. Through the first nine months of the fiscal year ending June 29, the product represented 52% of Apple’s $296.1 billion in revenue.
Faced with increasing competition, including from China-based Huawei, iPhone sales have fallen. In the most recent quarter, they fell 1% to $39.3 billion.
More worryingly, the product has also lost market share. Apple’s iPhones accounted for 15.8% of smartphone shipments in the second quarter, up from 17.3% in the previous quarter. A year ago it had a 16% share.
Apple recently released a new version of the iPhone that it hopes can reverse the trend. It has new features including artificial intelligence (AI) capabilities. However, whether this will lead to existing customers upgrading to the expensive models or users switching to an iPhone remains unclear. It is still too early to judge the impact of the new features on sales. While initial sales have reportedly been disappointing, investors should have more information when Apple reports quarterly earnings in about a month.
Can services support growth?
A bright spot for Apple remains the turnover from providing services. These include advertising, ancillary products, cloud services, the App Store and payments.
In the last quarter, service revenue grew 14.1% to $24.2 billion. And this category has a much higher gross margin than products, 74% versus 35.3%.
However, the US government and several states have claimed that Apple’s iPhone has an illegal monopoly, making it too difficult for consumers to switch phones and develop apps. This can result in a lengthy process, the outcome of which remains uncertain. These issues could hurt the profitability of Apple’s services business.
Meanwhile, Vision Pro, the much-talked-about product launched earlier this year after a shortage of brand new product categories, doesn’t seem to have gained much traction. With a high price tag for the combined augmented and virtual reality headset, sales appear to be disappointing. Management now expects to sell 450,000 units in the first year, well below the initial estimate of 800,000.
The decision
The stock’s gains over the past year have led to a richer valuation. Apple’s stock has a price-to-earnings (P/E) ratio of 34, up from about 28 a year ago.
The stock is also selling at a higher multiple than the S&P500‘s P/E of 30, making it more expensive than the overall market. The S&P 500 makes a good comparison because it consists of large-cap stocks.
A higher valuation might seem justified if Apple had better growth expectations than the market. However, its main product, the iPhone, is slumping, and it is unclear whether the new phone version can counter this decline. It doesn’t seem likely that the new AI feature will provide a competitive advantage in the long term, as others will likely integrate something similar soon.
Coupled with a government investigation and unclear prospects for the latest product, I’d sell all the Apple stock you own.
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*Stock Advisor returns September 30, 2024
Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Apple. The Motley Fool has a disclosure policy.
Is Apple a Buy, Sell, or Hold in 2025? was originally published by The Motley Fool
