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Apple: Should You Hold It for the Long Term?

[Updated on May 10, 2017] Apple shares have increased by 38% since the start of the year on the back of a share buyback program that was extended to return $300 billion to shareholders by March 2019.

However, 2016 was a frustrating year for Apple (AAPL ) and its fans. They almost ran out of excuses to defend Apple’s position as an innovative company. Removing the headphone jack and calling it courage? What were they thinking? The stock got pretty beat in 2016 but since then Apple has hit an all-time high in anticipation of their most important product launch in a long time (yes, the big 10th’ iPhone anniversary).

Should investors still trust the Cupertino company to turn things around or are their best days behind them?

The iPhone Sales Problem

Apple shipped fewer phones in almost every quarter in 2016 compared to the year before. Even the first two quarters of 2017 are expected to follow the same trend. This is despite the company’s focus on emerging markets and global smartphone sales increasing by more than 6%. Apple CEO Tim Cook claimed to sell more iPhones in Q1 2017 (than ever before) but that’s barely higher than same period sales in 2016 or 2015. To put things into context, this is after Apple got an unexpected Christmas gift from its Korean rival, Samsung, that is estimated to lose $5 – 17 billion because of the battery fiasco with Galaxy Note 7.

While all is not good from the iPhone shipments perspective, there is no problem with profits. As per industry research reports that came out late 2016, Apple captured more than 90% of the smartphone industry profits in Q3 2016. Reports also claimed that Apple made more than 100% profits in the same quarter by covering losses from other manufacturers (e.g., LG, HTC). So even though iPhone shipments have stagnated in recent years and iOS market share has not been encouraging, Apple’s 38% gross margins have served them well. If the next iPhone lives up to the anticipation, a lot of the conversation will be back to normal.

Other Products Don’t Look Rosy Either

The iPhone numbers, as bad as they may look, are still better compared to their other products. Both iPad and Mac sales were down in almost every 2016 quarter compared to a year earlier. That trend is unlikely to change in 2017. For tablets, the overall market is shrinking and Apple has tried to counter that by launching an iPad Pro lineup that competes with not just the tablet market but also with devices targeted at creative professionals.

Apple product sales

The story on the Apple Watch is a bit more encouraging. The smartwatch market might be on a decline but Apple is absolutely killing it. Canalys estimates Apple to have cumulatively sold close to 12 million watches in 2016 and, as a result, successfully retained a dominant 50% market share in the smartwatch sector. For now, it might be a short-lived victory unless something drastically shifts and there is mass adoption of smartwatches.

But Wait, What About Services?

It is true that Apple has missed the mark on its products after 13 years of adrenaline-filled growth, but a lot of analysts miss the fact that revenue from services has increased 18% year-on-year in the first fiscal quarter (more than $7 billion in revenue). Apple CEO Tim Cook has set out a goal to double the services revenue by 2020.

Apple Pay has tripled its users in the last year and transaction volume has increased five fold. In fact, depending on the quarter you pick, services is now either the second or third largest revenue source for Apple behind the iPhone.

Apple quarterly sales

Apple is not just an innovative technology company but also an innovative business company. The lull period in product sales has not prevented it from meeting investor expectations. Given that the company is now also keen on dividends, it makes a good investment choice.

Click here to research the dividend history of Apple. Find out why Apple has a bulletproof balance sheet here.

What Does the Future Look Like?

First, are we missing something here? Why is Apple stock at an all-time high, if they have had two underwhelming years? Is this another case of irrational exuberance for the new iPhone? Gartner publishes something it calls a hype cycle. It is a spinoff from the usual technology life cycle that is taught in business schools. The point of this graph is not so much about trying to pick the technology that is mostly likely to reach mass adoption but about a general glance at the pipeline of possibilities.

Find out why it’s a perfect time to buy Tech here.

Product Life Cycle

It’s worth talking about artificial intelligence, machine learning, augmented reality and virtual reality. Depending on the science journals you geek out on or the business magazines you religiously devour, any of the above topics can get branded either as the future or a fad waiting to die. However, it is hard to deny that in some shape or form the near-term horizon of 5-10 years will have something to do with machine learning and artificial intelligence.

Even though Apple has missed out on capitalizing upon the lead it has with Siri, it is now waking up to the challenge and marking its presence across all its product lines: iPhone, iPad, Mac, Watch, TV and CarPlay. It has also (finally) opened up the Siri platform for developers mid last year. Further, Apple’s AI focus can be estimated from its 2015 acquisition of Vocal IQ and a recent publication on simulated + unsupervised learning.

There is almost too much news when it comes to companies that have a cult following like Apple. You can stay up to date with Apple’s latest news here.

The Bottom Line

It is hard to predict what a company might or might not end up doing in the future. However, if you have to make predictions, the best thing to do is to look at the track record. Apple not only has the track record but also plenty of cash to burn on research and buying innovative companies.

On a direct feature comparison, it appears that Apple is running behind on iterative advancements like wireless charging or the latest screen resolution. It is also very unlike Apple to not to keep its products updated or ahead of competition. But then, it seems to be a conscious choice not to deliver every cutting edge feature as soon as it is available. Apple likes to release features only if they pass through their very strict value funnel. Come to think of it, I recently sold my four-year-old iMac for more than $1200. That is a testament to the non-negotiable quality customers have come to expect from Apple. While it might still be hard to justify Apple as a fresh investment in your portfolio (given that the stock is at an all-time high), it is certainly worth holding onto.

Find the dividend yield of the technology sector on our dedicated page here. You can also get an individual company count and dividend yield of industries within the technology sector.