Apple (NASDAQ: AAPL) garnered attention last week with the launch of its groundbreaking product, the Apple Vision Pro. This virtual/augmented reality (VR/AR) headset, or “spatial computer,” as Apple touts it, is powered by the same chip found in its MacBook Air, enabling the Vision Pro to handle everyday computing tasks ranging from web browsing to video editing and beyond.
The product’s success is yet to be determined, but it’s worth noting that Apple’s current allocation of roughly 8% of its annual revenue to research and development hasn’t been this high since the lead-up to the first iPhone launch. This uptick suggests that the company is cooking up something substantial for the next decade.
Despite encountering challenges over the past year, Apple’s robust cash reserves and formidable brand instill confidence in its long-term growth prospects.
Here’s why Apple’s stock still holds promise for potential investors.
Weathering the Storm in Uncertain Markets
Apple faced a tough year, grappling with macroeconomic headwinds that led to four consecutive quarters of revenue declines in 2023. However, the streak was finally broken in the latest quarter, as revenue surged 2% year over year to reach $120 billion, surpassing Wall Street forecasts by more than $1 billion.
While the company managed to outperform estimates, concerns lingered among investors about its iPhone business, resulting in a 3% year-to-date decline in its stock. Notably, while smartphone sales saw a 6% uptick in Q1 2024, they plummeted by 13% in China. With heightened restrictions on the iPhone in this crucial market, which accounts for approximately 17% of Apple’s revenue, the company faces an uphill battle.
Sales in China may not see an immediate turnaround, with the emergence of formidable competitors like Xiaomi and Huawei. Nonetheless, the growth potential in other regions could counterbalance losses in China in the long run, especially as the company gradually reshapes its business to reduce its reliance on the iPhone. In Q1 2024, product sales in Europe, Apple’s second-largest market, soared by 10% year over year, while sales in Japan surged by 15%.
Despite recent setbacks, Apple’s free cash flow ascended by 10% to approximately $107 billion over the last year. This suggests that the impact of dwindling Chinese sales may not be as severe as the recent stock dip implies and indicates that the company possesses the financial resources to weather current headwinds and invest in high-growth tech sectors.
Apple: Poised for Steady Growth, but Patience Required
In the last quarter, Apple’s research and development expenditure neared $8 billion, hinting at the tech giant’s ambitious roadmap for the next decade. Market trends and the launch of its Vision Pro headset suggest a deeper foray into artificial intelligence (AI), VR/AR, and digital services. Sustained growth in these arenas could help Apple reduce its dependence on product sales, particularly the iPhone, over the long term.
The standalone AI market is forecasted to grow at a compound annual growth rate (CAGR) of 37% through 2030, potentially surpassing $1 trillion. Simultaneously, data from Fortune Business Insights indicates that the VR market is set to expand at a CAGR of 31% in the same period. With its loyal customer base and substantial cash reserves, Apple is well-positioned to reap significant rewards from these burgeoning sectors.
Furthermore, digital services are gradually emerging as Apple’s best-performing business, poised to surpass the iPhone. This segment encompasses income from the App Store and subscription platforms like Apple TV+, Music, and iCloud. Notably, the digital business accounted for about 20% of the company’s revenue and outperformed the iPhone for over a year, with the segment’s revenue surging by 11% year over year in Q1 2024, compared to the iPhone’s 6%.
Realizing returns on Apple’s investments and witnessing their reflection in its stock price will take time. Nevertheless, the present moment might offer an exceptional opportunity for long-term investment in Apple’s business. Its stock presents significantly more value compared to some of its competitors, indicating lower risk than other “Big Tech” stocks.
Amid its expanding presence in AI, VR/AR, and digital services, Apple’s stock beckons to long-term-minded investors as an alluring prospect.
Is it worth investing $1,000 in Apple at the moment?
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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 Amazon, Apple, and Microsoft. The Motley Fool has a disclosure policy.