As the world’s most valuable company, with a market cap of $2.9 trillion, it’s always a good idea to keep Apple (AAPL 0.35%) on your radar. The tech giant has hit some roadblocks this year as macroeconomic headwinds curbed consumer spending and led to repeated declines in Apple’s product sales.
However, the consumer tech market is gradually showing signs of recovery. Meanwhile, the company’s digital services business is rapidly expanding, outperforming all other segments in growth.
Improving market conditions are promising for Apple’s business as it heads into the new year, with now an excellent time to learn more about this company and potentially invest. So here are three things about Apple that smart investors know.
1. The smartphone market is gradually recovering
An economic downturn in 2022 triggered sales declines across tech. As inflation spiked, consumers were forced to cut discretionary spending, with many forgoing their annual smartphone upgrades. Consequently, global smartphone shipments fell 11% last year (per IDC). Market challenges have continued in 2023, with U.S. smartphone shipments tumbling 24% in the second quarter of 2023.
As one of the biggest names in smartphones, Apple hasn’t had it easy this year. Net sales for the iPhone decreased 2% year over year in fiscal 2023. About 50% of Apple’s total revenue is owed to the iPhone, making its business especially vulnerable to economic fluctuation.
However, easing inflation is gradually helping the smartphone market recover. Counterpoint Research shows smartphone shipments fell 19% in Q3 2023, an improvement from the previous quarter. Meanwhile, Apple’s primary contract manufacturer, Foxconn (aka Hon Hai Precision Industry), surprised investors last week by reporting an 11% rise in profits for Q3 2023, beating analysts’ expectations.
Research firm Canalys credited the growth to new phone releases from Apple and Huawei, which “electrified the market” and could be a sign of positive news ahead.
2. Apple is seeing impressive profit margins in its services segment
Apple’s services have been a bright spot over the last two years, proving far less vulnerable to macroeconomic headwinds than products. The digital business includes the App Store and subscriptions for Apple TV+, Music, iCloud, and more. The success of these platforms has made services Apple’s second-highest earning segment after the iPhone, and could be on a path to eventually leapfrog the smartphone business.
Services are a particularly lucrative area for Apple, boasting profit margins of over 70%. Comparatively, the same metric for products comes in at around 36%.
Those margins are only made more attractive when looking at services’ revenue growth. The segment posted a net sales increase of 14% year over year in 2022, double the iPhone’s growth. Then, in fiscal 2023, services revenue rose 9%, while iPhone sales fell.
The trajectory of services is positive for Apple’s long-term outlook, as its strength against economic declines will allow the company to lean less on product sales during uncertain times.
3. Apple remains a reliable long-term buy
Apple’s stock has climbed over 300% in the last five years. Recent hits to its business suggest the company might now be able to live up to the same growth over the next half-decade. However, Apple’s financials remain a compelling reason to invest in its stock and could offer reliable gains over the long term.
The chart below illustrates how Apple’s free cash flow far exceeds some of its biggest competitors, including Alphabet, Microsoft, and Amazon. The figures show Apple has the funds to overcome current challenges and continue investing in its business.
Data by YCharts
Moreover, Apple shares have continued to rise in 2023 despite poor market conditions. Its stock is up 47% year to date, staying resilient during the challenging period. Apple’s reputation for reliability has outshone recent revenue declines, as investors have kept faith in the company.
Wall Street’s trust in Apple will only take it so far. However, a gradually recovering tech industry and booming services business will likely keep the company growing over the next five to 10 years.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, and Microsoft. The Motley Fool has a disclosure policy.
