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Should You Buy Apple (AAPL) Stock?

Matt Whittaker
·6 min read

As the world increasingly demands mobility for work and learning because of the pandemic, sales of Apple's (ticker: AAPL) Macs and iPads have helped offset a decline in iPhone sales. Still, the decline in Apple's biggest source of revenue last quarter isn't as alarming for investors at it might sound. After all, users were patiently waiting for the new 5G iPhone 12 to come out.

But the pandemic has also ushered in such uncertainty about the global economy that the company isn't providing guidance for sales during the current quarter, which includes the all-important holiday shopping season.

During the most recent quarter, Mac sales rose more than 29% while iPad sales rose nearly 46%. In terms of iPhone sales, which make up the biggest single chunk of Apple's revenue, declined more than 20% year over year. Overall, Apple saw net sales inch higher, growing slightly more than 1% year over year while diluted earnings per share of 73 cents declined slightly from EPS of 76 cents during the quarter a year ago.

The latest results were from Apple's quarter ended in September, which means they don't include sales data for the iPhone 12, which was delayed and released in October. Apple's CFO Luca Maestri said during Apple's Oct. 29 conference call that the company had started shipping the iPhone 12 and iPhone 12 Pro and would start preorders on the iPhone 12 Mini and iPhone 12 Pro Max soon.

"Given the tremendously positive response, we expect iPhone revenue to grow during the December quarter," he said. "We expect all other products in aggregate to grow double-digits, and we also expect services to continue to grow double-digits."

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Apple Stock at a Glance

Founded in 1976, Apple burst onto the scene with the introduction of the Macintosh in 1984, taking the personal computer mainstream. Led by Steve Jobs, who would become the ultimate Silicon Valley icon when all was said and done, the upstart business -- which started in a garage -- would go up against multibillion-dollar entrenched industry players like IBM ( IBM) and Hewlett-Packard ( HPQ).

Jobs' insistence on building a closed ecosystem instead of catering to the masses out of the gate like Microsoft ( MSFT) did make for a slower slog, and he was forced out of his own company, only to return when the company was in deep trouble in 1997.

From there, he built Apple back to prominence -- with the iPod, released in the 2001, becoming a blockbuster hit for the company. The 2007 release of the iPhone set in motion a practically unstoppable momentum for the company that continues to the present day.

The company's ability to merge its hardware with its own software and the creation of a product ecosystem that includes the iPhone, Mac, iPad, Apple Watch and Apple TV make for a seamless experience across all devices and adds a level of cushioning against competition in the ever-changing technology landscape.

Pros of Buying Apple Stock

Although there are risks to Apple's reliance on the iPhone, there are also clear benefits for the company of the phone's popularity and customer loyalty. Despite the decline in iPhone sales during Apple's latest quarter, the iconic smartphone isn't going away anytime soon, and it's likely to continue powering Apple's revenue for some time.

[Read: Should You Buy Netflix (NFLX) Stock?]

Matthew Fox, founder of Ithaca Wealth Management, views the iPhone 12 rollout as an opportunity for people to upgrade their older models.

"You just have a massive pent-up base of hundreds of millions of iPhone users who are using an outdated phone," he says.

The smaller and cheaper iPhone 12 may help Apple gain market share in the smartphone market, says JoAnne Feeney, portfolio manager with Advisors Capital Management. An Oct. 29 report from International Data Corp. showed Apple in fourth place for global smartphone shipments, with 11.8% market share, behind Samsung Electronics, Huawei Technologies and Xiaomi Corp.

"There's room for them to grow," says Stephen Lee, founding principal with Logan Capital Management.

By selling more Macs, iPads, wearable devices and services, Apple is positioned to sell more iPhones because they're designed to work seamlessly with those other products, Lee says. "That's baked-in demand for the iPhone 12," he says. The adoption of 5G devices by global telecommunications companies seems like it will provide a tailwind for the iPhone 12 rollout as well.

The services side of Apple's business, which includes iTunes, is another reason to like the company, Feeney says. "This is not just a hardware company," she says.

The services side is growing as a share of Apple's overall business, and that could increase the company's valuation over time because the services business has higher margins, Feeney says.

Cons of Buying Apple Stock

As with many companies in the tech space right now, overvaluation could be a concern. Based on price-earnings and price-sales ratios, Lee says Apple is on the expensive side when compared with where it's been historically.

Apple's price-earnings ratio was around 35 following its recent earnings report. That's well above the median of 15.6 during the past 13 years.

That valuation comes at a time when U.S. consumers are on shaky ground because of the pandemic, Fox notes. That raises the question of how many will upgrade when their older iPhones are serving them well, Fox says.

[READ: Should You Buy Amazon (AMZN) Stock?]

Regulatory risk is also one of the potential cons when it comes to owning Apple stock, Lee says. Still, antitrust worries seem to be limited to the services side of the business as there is plenty of competition in the market for smart phones, tablets and wearables, he says.

Also, to gain share in the smartphone market, Apple will need to sell more of its cheaper phone models, which creates a headwind for margins, Feeney says.

More broadly, even before this most recent quarter's drop in iPhone sales, the smartphone hasn't been the unstoppable growth engine it once was, keeping enormous pressure on Apple to diversify its revenue streams and grow other divisions quickly.

The Bottom Line: Should You Buy Apple Stock?

While valuation and huge dependence on the iPhone are still issues, it seems like the iPhone 12 rollout has potential. And as one of the world's biggest cash cows, Apple has continued to churn out profits even in the midst of a global pandemic. It seems the company will be around for a long time, and this fact alone gives Apple shares value.

Fox says Apple should be a core holding in retail investor portfolios.

"They have such an entrenched user base," Fox says. "Most people who have an iPhone aren't looking to switch. They're setting themselves up to have lifelong customers. They're a company you want to bet on."

Despite its valuation, it seems that Apple stock is a buy, provided investors are willing to hold for the long term. However, these buy-and-hold investors may want to look for a decent dip in share prices before taking a bite out of Apple.