With revenue of $383 billion for fiscal 2023 and a current market capitalization of $3.4 trillion (as of July 1), Apple (NASDAQ: AAPL) is one of the most followed companies in the world. It sells some of the most popular products on the market and the brand has incredible power and recognition.
Many investors are probably convinced that they know Apple very well. However, there is one little-known fact that cannot be overlooked when it comes to this “The Magnificent Seven” business.
Going digital
In fiscal 2023, Apple generated $298 billion, or 78% of its total revenue, from hardware sales. And unsurprisingly, the iPhone accounted for the vast majority of that figure. This isn’t groundbreaking news. Apple’s success can be attributed to its ability to create beautifully designed, easy-to-use products that consumers can’t seem to get enough of. And that’s what it’s still known for today.
However, the software and services sector has rapidly grown in importance, and many investors may not realize this.
In the previous fiscal year, $85 billion, or 22% of total revenue, came from software and services. That’s up 84% from fiscal 2019. That’s a much faster pace of growth than the 39% increase in the devices segment during the same period. In other words, this hardware business is slowly evolving into a digital enterprise.
Apple’s software and services offerings include AppleCare, iCloud, Pay, Card, Music, Fitness+, TV+, News+, Arcade, and the App Store. Additionally, digital advertising is also included in this segment.
In addition to driving faster growth, the division is helping Apple on the bottom line. Software and services have performed exceptionally well. Gross margin of 75% in the second quarter of 2024 (ended March 30), which compares very favorably to the 37% gross margin on devices. With lower hardware revenue, the tech giant should theoretically see its profits increase.
Software and services also benefit Apple because they are precisely what creates the company’s powerful ecosystem. The great Warren Buffett, whose Berkshire Hathaway holds a $171 billion stake in the company, once clearly articulating what makes Apple so special.
He said that if you offered someone $10,000 on the condition that they never use an iPhone again in their life, they would probably say no. I think this is because of Apple’s hardware and software and how they work together to attract and retain consumers.
Should You Buy Apple Stock?
There are currently over 2 billion active Apple devices worldwide. This gives the company unmatched distribution when it comes to developing and launching new software offerings and features. Therefore, it is still essential to understand that hardware remains critical to Apple’s success.
But that’s proving to be a problem. Now that it’s been 17 years since its initial launch, the iPhone is a mature product. Shareholders can’t expect this product alone to generate significant, sustainable growth over the long term. In fact, Apple’s revenue fell 2.8% in fiscal 2023. And it’s only expected to grow at a compound annual rate of 5.3% over the next three years.
The limited growth prospects are the main reason I don’t think investors should buy this stock. The other obvious reason is Apple’s valuation. The stock is trading at a price-to-earnings ratio of 34, which is a 57% premium to the 10-year average. This leads me to believe that future returns are likely to disappoint.
While Apple is one of the most competitively advantaged and financially strong companies the world has ever known, that doesn’t automatically mean it deserves a spot in your portfolio right now.
Should You Invest $1,000 in Apple Right Now?
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Neil Patel and its clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Think you know Apple? Here’s a little-known fact you can’t ignore. was originally published by The Motley Fool
