If you bought Apple (NASDAQ: AAPL) If you had bought stocks 10 years ago and held them, you’d be a pretty happy investor. Over the past ten years, the stock has generated a return of almost 800%. As a result, a $50,000 investment would be worth about $450,000 today.
Apple is a great story. The company was once on the brink of bankruptcy, but eventually became one of the largest companies in the world. Now, given Apple’s current size, you might think that the stock won’t be able to deliver the same performance as it has over the past decade. However, there are a few things to keep in mind.
One is that Apple’s ten-year achievement occurred when it was already the largest company in the world at the start of this period. Second, all of this outperformance occurred years after founder Steve Jobs passed away. With that in mind, let’s see if an investment in Apple can set you up for a lifetime.
Reasons to be optimistic about Apple
While Apple is best known for its popular iPhone, the real driving force behind its business in recent years has been its services business. Powered by its app store, Apple gets a share of almost every dollar spent through the platform. Currently, it gets up to 30% of every sale on its platform in most regions, or 15% from smaller developers.
While that may sound like a lot, it is comparable to other distribution models. For example, Roku offers a discount of 20% to 30% for streaming channels on its platform (excl Netflix), while markups on certain goods from retailers can be quite high. The beauty of Apple’s model, however, is that the app store has very low overhead costs for app distribution.
As such, this leads to an activity with a very high gross margin. Last quarter, the services sector had a gross margin of 74%, compared to a gross margin of 35% for the product activities. The services segment includes other attractive high-margin businesses such as Apple Pay, Apple Care and cloud services, where users pay to get more storage space on their devices. It’s also home to Apple TV and Apple Music, which likely have much lower margins due to content costs.
Apple has managed to become one of the most valuable companies in the world by creating a walled garden system over which it has a lot of control. This not only helps create a smooth experience for users, but also a very sticky experience. Users often remain part of the Apple ecosystem. Even as device sales have struggled recently, high-margin service revenues are still growing nicely, as evidenced by the 14% revenue increase last quarter.
In the future, Apple should have a great opportunity with artificial intelligence (AI). This probably happens in two ways. The first is that AI should drive a hardware upgrade cycle in the coming years as consumers upgrade their iPhones to newer models to run AI applications. Second, Apple should see a nice boost to sales and profits as users purchase more AI-related apps from the app store.
Risks of an Apple investment
An investment in Apple is not without risks.
The company has the potential to lose a large portion of its high-margin revenues Alphabet to use Google as the default search engine on its devices. Alphabet recently lost an antitrust lawsuit, and one of the government’s big points of contention was the deal between the two companies.
The Google deal is estimated by Jefferies analysts to be worth as much as $25 billion per year, as Alphabet paid Apple 36% of its search revenue that came from Safari as the exclusive search engine for the web browser. While that’s only about 6% of Apple’s revenue, it’s pure margin, so it’s expected to be close to 20% of operating profit.
The final resolution of the antitrust case against Alphabet is still unknown, but the exclusive search agreement between Apple and Alphabet is likely to have an impact. I didn’t expect all this income to disappear. There could still be a non-exclusive revenue sharing deal between the two, and it’s likely that most users will continue to use Google Search as the default given the alternative options. In this scenario, Alphabet may pay a smaller percentage, but maybe not. Meanwhile, all other search engines should probably pay a percentage of their search revenue as well.
Apple could also choose to use an internally developed search engine and keep all ad revenue from searches on its devices. Although the company prefers Google, the internally developed option can be used if it does not get enough money due to the loss of the exclusive deal. Rumor has it that Apple has been working on a search engine for a few years. If true, it could at least use this as leverage when negotiating non-exclusive deals.
Apple also faces regulatory risk for its App Store business as companies have complained about the company’s budget cuts. However, the tech giant has won lawsuits in the US in the past and has come up with creative ways to prevent app developers in Europe from using third-party app stores after the European Union forced it to open up its operations. This included charging third-party app stores for the core technology 50 euro cents ($0.54) per user per year. Additionally, app developers who have more than 1 million installs per year would have to pay the same amount for every new install over 1 million. That can quickly make a lot of money.
A long-term winner
Although Apple faces a number of risks, the company has shown in the past that it is resourceful and can mitigate anything that comes its way. The stock has been a long-term winner for a reason, and I don’t see that changing. Meanwhile, AI could be the next catalyst to drive stocks higher.
While Apple stock on its own may not be enough for future life, it can still be a solid core holding in your portfolio.
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*Stock Advisor returns October 14, 2024
Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool holds positions in and recommends Alphabet, Apple, Netflix and Roku. The Motley Fool has a disclosure policy.
Could Buying Apple Stock Today Save You a Lifetime? was originally published by The Motley Fool
