Apple (AAPL +2.08%) evokes strong emotions from people. It's long been seen as creating "cool" products with sleek designs that appeal to consumers.
It has also been hugely profitable, driving market-beating returns over the years. In the last 10 years, Apple's shares have gained 734%, easily besting the S&P 500's 168%.
However, the stock has hit a bump in the road lately. What does this mean going forward? While no one has a crystal ball, taking a clear-eyed look at a company's prospects can help you make an informed investment decision and improve your chances of success.
Image source: Getty Images.
iPhone influence
You've undoubtedly heard about a lot of Apple products. Its lineup includes the iPhone, Mac, iPad, AirPods, and Apple Watch.
But iPhones generate most of Apple's sales. In its first fiscal quarter, which ended on Dec. 31, 2023, iPhones accounted for 58% of the company's top line.
Apple's iPhone quarterly sales were $69.7 billion, up 6% from a year ago. While that doesn't sound so bad, it released a new model in late September, which typically drives growth. And sales don't seem likely to accelerate anytime soon.
The product faces intensifying competition, including from lower-cost models from Chinese manufacturers. Overall, Apple's sales in China dropped by 12.9% to $20.8 billion, which management blamed in part on weak iPhone sales along with other products.
The iPhone's portion of new U.S. activations has continued to drop, according to research company Consumer Intelligence Research Partners. The share was 33% in the 12-month period that ended in March, down from 40% a couple of years ago.
Governments take action
The U.S. government and certain states think Apple's applies monopolistic pressure to the market. That creates uncertainty about Apple's future.
The U.S. government claims Apple's iPhone monopoly in smartphones includes behavior that makes it difficult for people to switch phones, and prevents the development of apps and other items related to games.
No one knows how this will play out. It will likely involve a long, expensive process. But any decisions or settlements could affect Apple's robust service business. This includes the App Store, payment services like Apple Pay, and subscription-based services.
Services' sales grew 11.3% in the first quarter, to $23.1 billion. Importantly, this business has around a 70% gross margin, about double that of its product sales. Hence, any effect on Apple's business practices could hurt the company's overall profitability.
Expensive vision
Apple launched its Vision Pro in the U.S. earlier this year. There remain questions about how quickly people will purchase the augmented reality headset.
It has a $3,500 price tag, and it faces competition. This includes Meta Platforms' (META 1.18%) less expensive Quest device.
With a high price tag, competition, and a bet that people will constantly wear the headsets, Vision Pro may not prove a panacea for Apple.
Valuation
Apple's stock has dropped 12% this year, badly lagging the S&P 500's 7% gain. The share price decline means they sell at a lower price-to-earnings (P/E) ratio.
NASDAQ: AAPL
Key Data Points
The stock's P/E multiple has fallen from over 30 to 26 since the start of the year. That's slightly less than the S&P 500's 28 P/E.
But that doesn't mean Apple's shares represent a bargain. With intensifying competition for its core iPhone product, a government investigation that could affect a major profit center, and a new product that people may not adopt quickly, I have questions about Apple's future.
At this point, I'd sell the shares. If you see these issues resolved satisfactorily and a better picture emerges, you can always buy the stock again.
