Even as one of the most valuable companies in the world, Apple remains a great stock pick.
Tech giant Apple (AAPL -0.12%) has been around a while and has delivered market-crushing returns over its long and storied history. However, some investors and analysts now feel it's no longer worth investing in the iPhone maker. The market cap now tops $3 trillion, which limits its upside potential, especially since Apple's biggest moneymaker -- the iPhone -- no longer generates the kind of year-over-year growth in sales that it once did.
While these are fair concerns, there remain solid reasons to buy Apple's shares and hold onto them for good. Let's consider three such reasons.
1. Apple's culture of innovation
How does a company remain relevant for decades? It's generally not enough to offer necessary products or services. Even in industries such as healthcare, corporations need to innovate constantly to avoid becoming dinosaurs. That's also true -- and arguably more so -- in the tech industry where Apple operates. The company has stayed relevant and thriving for as long as it has largely because it's created a culture centered around innovation.
Apple doesn't need to be first to market. It expertly takes existing products and adds its own spin to them. That's what it did with the iPhone and many other technologies. More recently, the company finally announced its artificial intelligence (AI) plans: It will add various AI functionalities to eligible devices (including the iPhone 15 Pro and beyond). While some observers worried that Apple was getting behind in the AI race, the company has made a meaningful move.
No doubt there will be more to come. Beyond AI, Apple pours plenty of money into research and development (R&D) to avoid becoming a dinosaur -- and, in fact, to remain highly relevant for a long time, just as it has throughout its history. That's an excellent reason to consider the stock.
2. An incredibly deep ecosystem
Apple's success has paid off in many ways, one of which is that it now boasts a deep ecosystem of devices and customers who use at least one of them; more than 2 billion Apple devices are in circulation. It's difficult to overstate the value of this base of customers.
The company knows it, too -- that's why it's ramping up its services segment, through which it offers a variety of services including Apple Music and Apple TV. Apple has more than 1 billion active paid subscriptions.
Here's another perk of Apple's strategy to increasingly rely on services: While making and selling hardware is a relatively low-margin business, the opposite is true for the services it offers to its vast base of customers. So, over time, there's a good chance that gross and profit margins will improve. That's great for the business.
It's true that the services unit still doesn't provide a substantial portion of its top line. In the second quarter of its fiscal year 2024 (which ended March 30), Apple's services revenue came in at $23.9 billion, about 14% higher than the year-ago period.
Apple's total sales of $90.8 billion dropped by about 4% year over year, so services accounted for only roughly 26% of total sales. But that number has generally grown over the years -- it was just 10% in the third quarter of 2015. This trend bodes well for Apple's long-term prospects.
3. Apple's competitive advantages
Though Apple benefits from a deep ecosystem, can it keep most of its customers? Thanks to its competitive advantages, it should be able to do so. Apple's business benefits from the network effect, switching costs, and a strong brand name, all of which are important sources of a competitive edge.
Apple's network effect can be seen in its App Store: The more people use it, the more valuable it becomes to developers, and vice versa. That's the hallmark of the network effect: The value of services increases with use.
Apple's devices also have features that other smartphones or tablets don't have, making communication between Apple-centric devices extremely convenient. Leaving the ecosystem means leaving these behind, hence the switching costs.
Lastly, Apple routinely ranks as one of the most valuable brand names in the world. These features make it likely that its business remains solid despite stiff competition.
Buy and forget
Like every company, Apple faces headwinds; a decline in iPhone sales in China and antitrust lawsuits both come to mind. However, the company has more than enough going its way to appeal to investors, including an excellent dividend program. So, if you're interested, look past Apple's recent struggles and consider sticking with the company for good.
Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
