With fiscal 2023 revenue of $383 billion and a current market cap of $3.4 trillion (as of July 1), Apple (NASDAQ: AAPL) is one of the most widely followed companies on the face of the planet. It sells some of the most popular products out there, and the brand carries incredible power and recognition.
Many investors are likely confident they’re very familiar with Apple. However, there’s one little-known fact that can’t be overlooked when it comes to this “Magnificent Seven” business.
Going digital
In fiscal 2023, Apple generated $298 billion, or 78% of its total revenue, from the sale of hardware devices. And unsurprisingly, the iPhone represented the vast majority of this figure. This isn’t groundbreaking news. Apple’s success can be attributed to its ability to create beautifully designed and easy-to-use products that consumers can’t seem to get enough of. And this is what it’s still known for today.
However, the software and services segment has been rising quickly in importance, and it could be something that many investors might not realize.
Last fiscal year, $85 billion, or 22% of total revenue, came from software and services. This figure is up 84% compared to fiscal 2019. That pace of growth is much faster than the 39% gain registered by the device segment during the same time. In other words, this hardware business is slowly transitioning to 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 lumped into this segment as well.
Besides driving faster growth, this division helps Apple on the bottom line. Software and services posted a stellar gross margin of 75% in Q2 2024 (ended March 30), comparing very favorably to the 37% gross margin on devices. As less revenue is derived from hardware, the tech giant should theoretically see profits rise.
Software and services also benefit Apple because they are precisely what creates the company’s powerful ecosystem. The great Warren Buffett, whose Berkshire Hathaway has a $171 billion stake in the company, once clearly articulated what makes Apple so special.
He said that if you offered someone $10,000 on the condition that they could never use an iPhone again for the rest of their life, that person would most likely decline. I believe this is because of Apple’s hardware and software and how well they work together to attract and lock in consumers.
Should you buy Apple stock?
There are currently more than 2 billion active Apple devices across the globe. This gives the business unrivaled distribution when it comes to developing and launching new software offerings and features. Consequently, it’s still critical to understand that hardware remains vital to Apple’s success.
But this is proving to be a problem. Now that 17 years have passed since its initial launch, the iPhone is a mature product. Shareholders can’t expect this single product to drive sizable, durable growth over the long haul. In fact, Apple’s revenue dropped 2.8% in fiscal 2023. And it’s only projected to increase at a compound annual rate of 5.3% over the next three years.
The muted growth prospects are the key reason why I don’t believe investors should be buying this stock. The other obvious reason is Apple’s valuation. Shares trade at a price-to-earnings ratio of 34, which represents an eye-popping 57% premium to the trailing-10-year average. This leads me to believe that returns going forward are likely to disappoint.
While Apple is one of the most competitively advantaged and financially sound businesses the world has ever seen, 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 his 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 1 Little-Known Fact You Can’t Overlook. was originally published by The Motley Fool
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