Apple at a Crossroads: Why AAPL Stock Is Still Poised for Pivotal Growth

Stock Market

It’s fitting Apple (NASDAQ:AAPL) stock represents both the largest company in the world and also the biggest seller of smartphones. The iPhone revolutionized communication. The tech giant is at a crossroads for investors. AAPL stock has consistently performed well. It’s total return over the last five years has quadrupled that of the S&P 500. It has outpaced the index by a factor of five.

Yet iPhone growth is slowing. It accounts for 52% of revenue but sales were down almost 3% last year. So was every other category of hardware. The one area still showing growth is services where revenue was 9% higher. As it represents a little more than one-fifth of total sales, it might be hard to carry the company. Investors are right to wonder whether Apple can hold its smartphone lead and top valuation.

Headwinds and AAPL Stock

Wall Street always thinks the sky is falling for iPhone sales. They expect the worst to follow if there aren’t always blowout numbers coming one after another. However, Apple offers long-term growth that is consistently higher even if the quarter-to-quarter numbers are choppy.

For example, in the just completed period, iPhone revenue set a quarterly record. It also hit new records in many other countries for the September quarter while reaching a new all-time high in India. The new iPhone 15 helped push segment revenue to $43.8 billion, up 3% year over year. 

China saw higher revenue, even with unfavorable currency fluctuations. If the market is contracting, CEO Tim Cook believes Apple gained share. Last year, analysts were saying the iPhone had fallen from its perch because of a resurgence by Huawei.

BofA Securities analyst Wamsi Mohan recently upgraded AAPL stock with a new price target of $225 per share. That’s up from his previous one-year target of $209 per share and 15% above where the stock currently trades.

Mohan believes a new upgrade cycle may be here and likes the new Vision Pro mixed reality headset as a potential sales driver.

A Vision for the Future

Apple continues to innovate. As the analyst notes, the Vision Pro has vast potential. Apple sold out of the headset upon its debut with TF International Securities analyst Ming-Chi Kuo estimating anywhere from 160,000 to 180,000 units were sold. With Apple expecting a 400,000-unit first-year run, that’s 40% of the total.

Yet it is services where Apple was long seen as building to a crescendo. Services like iCloud, Apple Music, and Apple Pay are high-volume, repeatable revenue streams with very high margins attached to them.

It already has a bevy of products out that contribute to rising sales, but as it develops new products like the Vision Pro it will be able to monetize them too.

The headset, for example, will enable users to watch Apple TV+ shows via the Apple TV app. Although Netflix (NASDAQ:NFLX), Spotify (NYSE:SPOT), and YouTube are currently withholding their services from the headset, content will grow over time.

An Embarassment of Riches

Apple is a behemoth. With operating profit margins of 30% and net margins running north of 25%, the tech leader also throws off a lot of cash. It ended the third quarter with more than $62 billion in cash and generated over $1 billion in free cash flow.

It pays a dividend that yields a modest 0.5% but it has sufficient coverage to make it safe. There is also more than enough room to grow to reward shareholders if sales growth appreciably slows. There is no indication Apple won’t maintain lofty sales numbers though, meaning it should hold its lead atop the market.

On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.

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