Apple Stock: Diversification at High Margin

Apple Stock


The prognosis for Apple (NASDAQ:AAPL) could be clearer. The rest of the economy is likewise in a precarious position, so investors are taking any news from a good perspective.

Apple stock is divisive. Those bullish on the stock see it as a safe investment since the company is reliable and successful. On the other hand, Bears wonder whether there is any room for growth for new investors at a price of more than 25 times next year’s profits.

Apple to Invest More in Financial Technology?

Exciting new developments keep happening in Apple’s Service division. There is something for everyone in the Service industry, whether their interest is in health and fitness or music.

But the crux of the bull argument is the belief that this very profitable industry can maintain its present 71% gross profit margins via consistent, diversified sales.

In other words, something in this category may push through and sustain the whole segment, even if Apple’s digital advertising and mobile games could shine more brightly.

For instance, Apple could boast that it had 2 billion active smartphones in the most recent quarter. With such a large base of paying customers, all Apple has to do to keep the Services division bringing in positive incremental gross margins is release goods at the inflation rate.

During the earnings call, Apple announced its foray into Buy Now and Pay Later (“BNPL”) and expressed satisfaction with the early results of its effort to provide customers with a savings account.

In reality, Apple is best known for being conservative. Apple takes its time to ensure its goods are a perfect match for consumers. In addition, many more encouraging developments along this path will be reported in future quarters.

One major flaw in this investing theory will be discussed immediately.

Saturation of Revenue Growth Rates

Apple’s fiscal Q3 2023 faces favorable comparisons, but the company’s outlook still needs to be appealing. Looking forward to the fourth quarter of 2023, Apple will face even tougher competition.

In the next six months, Apple’s sales growth is forecast to be at most two percent (FX adjusted).

Therefore, investors are exposed to a very high multiple on Apple stock despite its status as a ”safe haven” for their money.

However, no one can deny that investing in large-cap stocks during the previous two years has been wise. There needs to be more useful in dwelling on the results of the recent past while making investment decisions; instead, focus on the coming 12 months.

The Prognosis for Profitability Is Looking Up

Apple’s gross profit margins were 43.7% in the company’s fiscal Q2 2022, and the company expects them to be between 44% and 44.5% in the third quarter of this year. Given Apple’s history of providing cautious advice, a year-over-year increase of around 700 basis points in gross margins is reasonable.

Apple has confirmed that it plans to maintain its dividend increase policy. The bulk of the capital budget is still anticipated to be used for share repurchases.

Remember that Apple has repurchased over $43 billion in shares in the last six months. So, when Apple says it wants to buy another $90 billion in shares as it moves toward a balanced balance sheet, we expect the rate of share repurchases to be consistent with the prior 6 months.

Specifically, Apple’s stock repurchases at the current price represent around 3.3% capital return, in addition to its 0.6% dividend yield. This means that stockholders will get a total yield of 4% even if nothing else happens.

The Summing Up

The bear case against Apple Inc. must center on the company’s sluggish sales growth.

On the other hand, investors aren’t going to be willing to give up one of the few equities still holding up because of the innovation it has behind the hood.

After all, as I’ve said repeatedly, Apple is quite proud of its reputation for invention. And with over 2 billion in use, Apple has the infrastructure in place to keep releasing new goods, like its recent push into payments, and still grow at a rate faster than inflation.

While I agree that Apple’s valuation is high, Apple stock is not particularly vulnerable to a significant selloff. So many hedge funds and financial institutions need a safe haven for their cash to keep up with the market.

Featured Image: Pexels @ Daniel Lengies

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