If purchased apple (NASDAQ:AAPL) If you owned stocks 10 years ago and held onto them, you would have been a pretty happy investor. Over the past decade, this stock has returned nearly 800%. As a result, your $50,000 investment would now be worth about $450,000.
Apple is a great story. The company was once on the brink of bankruptcy, but has since become one of the world’s largest companies. Given Apple’s current size, one might think the stock won’t perform as well as it has over the past decade. However, there are some things to keep in mind.
One is that Apple’s 10-year performance came at a time when Apple was already the world’s largest company at the beginning of this period. Second, all of this outperformance occurred years after founder Steve Jobs passed away. With that in mind, let’s take a look at whether investing in Apple is a lifetime investment.
Reasons to be bullish on Apple
Apple is best known for its popular iPhone, but the real driver of its business these days is its services business. With its app store, Apple receives a cut of nearly every dollar spent through its platform. The company currently earns up to 30% of its revenue on the platform in most regions and 15% from smaller developers.
It may sound daunting, but it’s similar to other delivery models. for example, Roku receives a 20% to 30% share of the streaming channels on the platform (excluding Netflix), markups on certain items from retailers can be very high. However, the advantage of Apple’s model is that app store app distribution overheads are very low.
Therefore, this leads to a very high gross profit margin business. Last quarter, the services business had a gross margin of 74%, while the products business had a gross margin of 35%. The company’s services division includes other attractive high-margin businesses such as Apple Pay, Apple Care, and cloud services where users pay to increase storage on their devices. It’s also home to Apple TV and Apple Music, but profit margins can be quite thin due to content costs.
Apple was able to become one of the most valuable companies in the world by creating a walled system over which it had significant control. This not only creates a smooth experience for the user, but also helps create a very stable experience. Once users are part of the Apple ecosystem, they tend to stay. So even though device sales have struggled recently, high-margin services revenue continues to grow at a healthy clip, as evidenced by a 14% increase in revenue last quarter.
There will be great opportunities for Apple in the future with artificial intelligence (AI). This can occur in two main ways. The first is that AI should drive hardware upgrade cycles in the coming years as consumers upgrade their iPhones to newer models to run AI applications. Second, Apple should see a significant increase in revenue and profits as users buy more AI-related apps from the app store.
Risks of investing in Apple
Investing in Apple is not without risk.
The company could lose much of the high-margin revenue it previously earned. alphabet To use Google as the default search engine on your device. Alphabet recently lost an antitrust lawsuit, but one of the government’s major points of contention was the agreement between the two companies.
The deal with Google is estimated to be worth $25 billion a year, according to Jefferies analysts, and Alphabet would have paid Apple 36% of the search revenue it earned from Safari, its web browser’s exclusive search engine. is. This is only about 6% of Apple’s sales, but because it is pure profit, it is expected to be closer to 20% of operating profit.
The ultimate remedy for Alphabet’s antitrust lawsuit remains unclear, but the exclusive search agreement between Apple and Alphabet is likely to be affected. I don’t expect all this income to disappear. There may still be a non-exclusive revenue-sharing agreement between the two, and given the alternative options, most users are likely to continue using Google Search as their default. In this scenario, Alphabet would probably pay a smaller percentage, or maybe not at all. Meanwhile, other search providers will likely have to pay out a portion of their search revenue as well.
Apple also uses an internally developed search engine and keeps all the advertising revenue from searches on its own devices. The company prefers to use Google, but can also use in-house developed options if it loses exclusivity and is not well compensated. Apple has been rumored to be working on a search engine for several years. If true, this could at least be used as leverage when negotiating non-exclusive deals.
Apple also faces regulatory risks to its App Store business as companies complain about its share. But the tech giant has won lawsuits in the U.S. in the past, and after the European Union forced the company to open up its business, it found creative ways to prevent app developers from using third-party app stores in Europe. I’ve been thinking about it. This included charging third-party app stores a core technology fee of 50 euro cents ($0.54) per user per year. Additionally, app developers with more than 1 million installs per year must pay the same fee for every new install over 1 million. That can quickly add up to a lot of money.
long-term winner
Apple faces some risks, but the company has shown itself to be resourceful in the past and should be able to mitigate risks as they arise. There’s a reason this stock has been a long-term winner, and I don’t see that changing. Meanwhile, AI could be the next catalyst for rising stock prices.
Apple stock itself may not help you for the rest of your life, but it could still hold a firm place as a core part of your portfolio.
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Suzanne Frey, an Alphabet executive, is a member of the Motley Fool’s board of directors. Geoffrey Seiler is with Alphabet. The Motley Fool has positions in and recommends Alphabet, Apple, Netflix, and Roku. The Motley Fool has a disclosure policy.
Is it safe to buy Apple stock now? Originally published by The Motley Fool
