The tech giant is in the midst of diversifying its revenue base.
The market capitalization is $2.6 trillion, apple (AAPL -1.22%) is the second most valuable company in the world. The company has gotten this far by selling some of the world’s most popular consumer electronics products. This success has resulted in significant returns for shareholders over the years.
To be clear, this is still a company that survives on selling hardware. In the most recent fiscal quarter (Q1 2024, ending December 30, 2023), devices generated $96 billion in revenue, accounting for 81% of the total.
But Apple generated $23 billion in revenue in three months from something completely different. Is this up-and-coming segment a good enough reason to consider buying this? top warren buffett stocks?
Building the Apple ecosystem
Buffett once claimed that if you offered someone $10,000 on the condition that they lose their iPhone for life, they would probably decline the deal. This not only demonstrates the popularity of the world’s most successful smartphone, but also proves the power of Apple’s ecosystem.
Its ecosystem consists not only of different hardware devices but also different services. Apple’s services such as App Store, News, Music, Pay, Fitness +, TV +, iCloud, and advertising generated $23 billion in revenue last quarter. The division reported an 11% revenue increase in the first quarter, a much faster pace than the company’s product division.Even better, the service is also excellent gross profit 73%.
Apple’s profit margins should tend to increase over time as it derives more revenue from its services. From a competitive perspective, these services differentiate Apple within the industry. The result is loyal, obsessive customers who don’t want to leave the ecosystem. And it provides your business with a more predictable and regular revenue stream.
still dependent on hardware sales
Apple currently has more than 2.2 billion active devices worldwide. This number continues to increase every quarter. The company is trying to get more products into the hands of more consumers, which is clearly a positive trend.
It’s no surprise that as Apple expands its installed base of devices, its services revenue also increases. On the other hand, if for any reason this installed base begins to shrink, the service will suffer. This points to the fact that Apple relies on the continued success of its products to continue growing its services division.
That wouldn’t be a problem if the hardware sector was recording strong growth. But that wasn’t the case. In fiscal 2023, Apple’s overall sales decreased by 2.8%, and products decreased by 6%. iPhone remains the company’s major revenue contributor. However, as it enters the mature stage of its lifecycle, people are less motivated to keep upgrading to the latest version.
Bulls claim Apple plans to release Improved artificial intelligence (AI) capabilities, Consumers will rush to upgrade to the latest iPhone models while also purchasing other products such as MacBooks and iPads. This could revitalize the company’s sales.
Analysts aren’t so confident. They project that revenues will grow at an average annual rate of 4.5% from FY2023 to FY2026, which is a much slower projected growth rate than in the past.
As of this writing, Apple stock is down 12% since the beginning of the year and trading 14% below its all-time high. But don’t rush to buy this Buffett stock just yet. It is still sold at a high price. The current price-to-earnings ratio is 26.4 times, well above the average over the past 10 years.
Even though Apple’s services division is expanding, I think investors should sell their shares.
Neil Patel and his clients have no positions in any stocks mentioned. The Motley Fool has a position in and recommends Apple. The Motley Fool has a disclosure policy.
