Does it make sense to buy Apple shares (NASDAQ:AAPL) when they are trading near an all-time high? The answer to this simple question really depends on how much you believe in the company’s long-term growth story.
Before the company announced its latest earnings on July 31, pessimism was widespread about the future of the iPhone maker. The sales of iPhones, which account for more than 55% of the total revenue, were declining and analysts were calling an end to the super growth cycle that made Apple the most valuable enterprise in the world.
But that gloomy period came to a screeching halt since Apple released its third-quarter earnings report. The Cupertino, California-based technology giant blew past analysts’ expectations on many key metrics and presented a bullish forecast for the fourth quarter.
Since then, its share price has risen 9%, adding to its 20% rally this year at a time when other technology titans, such Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX), have seen their stocks hammered. The brightest spot in the third-quarter earnings report was that despite declining number of iPhone sales, Apple has been able to sustain its earnings momentum.
Sales during the third-quarter that ended on June 30 surged 17% to $53.3 billion against the analysts’ forecast of $52.3 billion, while profit rose to $2.34 per share, beating $2.16 a share consensus number.
Diversification Remains Key
So, what is CEO Tim Cook doing right to prove Apple’s bears wrong? We think the biggest factor that’s supporting the bullish case for Apple's stock going forward is the company’s success in diversifying its revenue base. And this is not a small achievement because Apple’s reliance on iPhones has been the major drag on its share price amid declining sales.
Apple reported record services revenue of $9.55 billion, up 31% from a year earlier. The category, which includes the App Store, Apple Music, iCloud storage and Apple Pay, has now more than 300 million paid subscribers. Cook says the company is on track to meet a goal of doubling services revenue by 2020.
Apple’s other products, which include AirPods headphones, the Apple Watch, Apple TV and the HomePod, also produced stunning growth, with revenue rising 37% to $3.7 billion.
Still a Great Buy-and-Hold Bet
If you’re a long-term investor and thinking to buy and hold Apple stock, the most relevant question to ask is whether the Apple stock has more upside potential after such a powerful rally?
I can’t predict where the Apple stock will be trading tomorrow, but from the fundamental perspective, the company has many positive catalysts that make it a great buy-and-hold bet.
Lost in the hoopla around Apple’s $1 trillion capitalization has been the fact that the main attraction of buying Apple stock for a long haul is not its super growth cycle, but its steadily growing dividend income and a massive share buyback plan.
On that front, Apple has an enviable track record. Since 2012, the company has returned $71 billion in dividends, $220 billion in buybacks and $9.6 billion in net share settlement to investors. Add it up and you’ll see that Apple’s total shareholder return was a whopping $300 billion through June 2018.
What makes Apple stock a strong long-term income generator for its shareholders is the fact that even after all the dividend hikes and stock buybacks, Apple still has a big hoard of cash to reward its investors. By the end of third quarter, Apple had more than $243.7 billion in cash.
This combination of solid free cash flow, accelerating top-line growth and an aggressive share-buyback program will continue to fuel more gains in Apple shares.
That said, Apple stock will continue to be affected by the cyclical nature of its iPhone business. But if your investing aim is to earn steadily growing income and decent capital gains over the medium term, you still haven’t missed the boat, even with its shares flirting with a record high price.