Apple | Fundamental Analysis

If you had invested in Apple stock ten years ago and held onto it, you'd be quite pleased today. Over the past decade, Apple has delivered a staggering return of nearly 800%, turning a $50,000 investment into approximately $450,000.

Apple's story is one of the most remarkable in business history. Once near bankruptcy, it has grown into one of the largest and most valuable companies in the world. Given its size, some may doubt that Apple can continue to generate the same explosive returns. However, there are a few factors that suggest potential for future gains.

First, Apple’s extraordinary 10-year performance happened while it was already the world’s largest company. Additionally, this success occurred long after the passing of its founder, Steve Jobs. With these points in mind, it's worth exploring whether investing in Apple today can still provide significant long-term rewards.

While the iPhone is Apple’s most iconic product, the company’s financial success in recent years has been driven by its services business. This segment, which includes the App Store, allows Apple to collect a portion of transactions made through its platform. In many regions, Apple takes up to 30% of sales, with smaller developers paying around 15%.

Though these fees may seem high, they are in line with other distribution platforms. For instance, Roku takes a 20-30% cut for streaming channels (excluding Netflix). What sets Apple apart is its low overhead in app distribution, making it a high-margin business. Last quarter, Apple’s services segment had a 74% gross margin compared to the 35% margin for its hardware products.

Apple’s services business also includes Apple Pay, AppleCare, and cloud services, all of which are highly profitable. While content services like Apple TV and Apple Music have slimmer margins due to production costs, the overall services segment remains a key profit driver.

Apple's dominance is rooted in its walled-garden ecosystem, which creates a seamless user experience and fosters customer loyalty. Once consumers enter the Apple ecosystem, they tend to stay. Even as iPhone sales have slowed, Apple’s services revenue grew by 14% last quarter, demonstrating the resilience of this high-margin business.

Looking ahead, Apple has significant opportunities in artificial intelligence (AI). AI could spur a hardware upgrade cycle as consumers seek devices that can handle AI-powered applications. Additionally, as more AI apps become available in the App Store, Apple could see further boosts in both revenue and profits.

However, Apple is not without risks. One major concern is the potential loss of high-margin revenue from its deal with Alphabet (Google), which pays Apple to remain the default search engine on its devices. Analysts estimate this agreement is worth up to $25 billion per year, but it could be affected by a recent antitrust ruling against Alphabet.

Even if the exclusivity of the deal is lost, it’s unlikely that all of this revenue will disappear. A non-exclusive revenue-sharing arrangement could emerge, and many users would likely stick with Google as their default search engine. Apple could also develop its own search engine, which would allow it to keep all the ad revenue generated from searches on its devices.

Additionally, Apple faces regulatory challenges regarding its App Store business, especially in Europe, where the company has been pressured to allow third-party app stores. In response, Apple has introduced a fee structure that charges these stores a core technology fee of 50 euro cents per user annually, along with fees for installs exceeding 1 million. These measures could help Apple maintain its revenue even with regulatory changes.

While Apple does face some hurdles, the company has consistently shown its ability to adapt. The rise of AI presents a new opportunity for growth, and Apple is well-positioned to capitalize on this trend through both hardware and services. Although the stock may not deliver the same 800% return as it did in the past decade, Apple remains a strong long-term investment. Its innovation, market leadership, and loyal customer base make it a solid core position for any portfolio.

For investors seeking stability and exposure to cutting-edge technology, Apple offers a compelling case for continued growth.

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