Apple is the second most valuable company in the world. Only Microsoft ranks higher, based on market cap. It plays a big role in many investors’ portfolios, and has previously featured in MoneyWeek’s share tips.
However, the tech giant’s recent performance has been uninspiring. It is the second worst performer in the Magnificent Seven so far this year, ranking only above Tesla. And that’s no great feat, given the dismal year the e-vehicle company has had so far in 2024.
Apple’s share price was down almost 9% year-to-date, prior to its quarterly earnings call on 2 May. This comes in a year where the Nasdaq has moved in the opposite direction. The broad stock market index is currently up almost 11%.
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This reflects the headwinds Apple is currently navigating – from increased competition in China to a lack of innovation in its product line.
Despite this, the company’s financial results beat analysts’ gloomy forecasts last week, with the share price rising as a result. The stock is now down a little over 2% year-to-date. The company’s management team also announced the biggest share buyback in US history, and a 4% increase to the dividend.
Against this backdrop, we assess the case for investing in Apple. Has the original poster child of market disruption lost its way? How attractive is its current share price? And what is the outlook for the company going forward?
What challenges is Apple facing?
Apple has earned investors glittering returns over the past two decades. If you had invested $1,000 in Apple twenty years ago, your investment would be worth more than $450,000 today, according to data from Morningstar Direct.
Despite this, the company has run into headwinds recently, causing some investors to question whether it has lost its way. A ten percent annual drop in iPhone sales has caused particular concern, given the iconic smartphone is the company’s flagship product.
Indeed, Apple has faced increased competition in recent years – particularly in the key market of China where the likes of Huawei, Vivo, Xiaomi, Honor and OPPO are vying for market share. And while Samsung doesn’t occupy much of the smartphone market in China, it continues to compete with Apple for the top spot on the global stage.
What’s more, Samsung pipped Apple to the post on both smartphone shipments and market share in the first quarter of 2024, according to the latest figures from the International Data Corporation (IDC).
The IDC suggests that both Apple and Samsung will be “looking for areas to expand and diversify” in light of the Chinese competitors snapping at their ankles. However, the worrying truth is that Apple’s product range has been going through an innovation dry spell.
Originally known for launching game-changing products, Apple has primarily focused on updating its existing product line in recent years instead. This has also hurt sales, with consumers leaving it longer before upgrading to the latest iPhone model. The differences between one model and the next can feel too small to warrant the cost, particularly against a backdrop of inflation.
Apple has also been quiet on all things artificial intelligence (AI) – the tech industry’s shiny new toy. AI has the potential to disrupt everyday life, and has unnerved and excited the world in equal parts. Some investors are nervous that Apple’s silence on the topic so far could result in it getting left behind.
Dan Coatsworth, investment analyst at AJ Bell, points out that a product announcement is expected from Apple this week. “It needs to pull a rabbit out of the hat,” he says, adding that rumours of a larger iPhone, new iPad, or enhanced Apple Pencil won’t quite cut it.
Apple’s latest results exceeded expectations
Apple released its latest quarterly results on 2 May, 2024. And while the results weren’t exactly inspiring, they did beat analysts’ expectations. Revenue fell 4% compared to a year ago, while profit was down 2%. The market had been bracing for worse. “That’s five quarters in a row it has beaten forecasts”, Coatsworth points out.
The company also announced an enormous share buyback worth $110 billion – the largest in US history. The main benefits of share buybacks are that they return capital to investors and push a company’s share price up. They also suggest a company’s management team has strong conviction in the value of its shares – good news if you are an investor.
As well as returning cash to shareholders in the form of a buyback, Apple increased its dividend by 4% for the twelfth year in a row.
Another piece of good news came from Luca Maestri, Apple’s chief financial officer, who revealed the number of active Apple devices has reached “a new all-time high across all products and all geographic segments”. This figure first surpassed the two billion mark in February last year.
The breadth of Apple’s reach bodes well for its growing services offering, which includes brands like Apple TV and Apple Music. The services arm of the business delivered a record $24 billion last quarter, up 14% compared to a year ago.
Should you invest in Apple?
“We’ve seen weakness from Apple over the last 12 months, but it would be naive to think it isn’t laying the foundations in the background, especially with the financial muscle the company possesses”, says Josh Gilbert, analyst at investment platform eToro.
“If they can navigate these next couple of tricky quarters and give investors more insight into AI plans and what’s ahead for the new iPhone 16, we’ll see a much shinier Apple come the end of 2024”, in his view.
Chief executive Tim Cook has teased “an exciting product announcement” this week, so that is something for investors to keep an eye on. They should also keep tabs on the evolving situation in China, and how Apple’s promising services arm continues to develop.
The bad news is that, despite recent challenges, Apple’s stock isn’t trading at a discount. Morningstar analysts recently upped their fair value estimate from $160 to $170. However, that is still below the current share price, which is just under $182 at the time of writing. Morningstar currently rates the stock as “fairly valued”.
