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Apple stock: Bull vs. Bear

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For much of the past two decades, Apple (AAPL -0.17%) He was a star not only in the business world, but also in the stock market.

The company dominates consumer tech hardware. It has the largest market capitalization of any American company, and it even has warren buffet as one of his biggest fans.

However, while Apple may have an admirable track record, that doesn’t necessarily mean its future is just as bright. Is Apple stock a buy today? Read on as two Motley Fool contributors discuss the bullish and bearish cases for the tech giant.

Several red Apple devices including phones and headphones.

Image source: Apple.

The numbers speak for themselves

Parkev Tatevosyan (Bullish Deal): My bull case for apple begins with its demonstrated ability to repeatedly create innovative technological hardware that consumers willingly pay high prices to purchase. The iPhone is arguably one of the most important consumer products in the world (measured in dollars spent). Notable products like iPod, iMac and many more preceded the legendary smartphone. Since iPhone, Apple has produced sought-after devices like iPad, Apple Watch, Airpods, etc. More importantly, millions of people are paying high prices for each of the aforementioned items, leaving excellent profit margins for Apple and its shareholders.

Between 2013 and 2022, Apple’s annual sales grew from $171 billion to $394 billion. Given the diverse and vast markets in which Apple sells products, it is unlikely to hit the sales cap anytime soon despite its already massive scale. The pricing power that Apple acquired over decades of improving the customer experience allowed it to achieve an average operating profit margin of 28.3% at the time.

Granted, these are all retrospective numbers, but Apple’s highly connected ecosystem makes it less likely that customers will switch to a competitor’s product. In other words, many of yesterday’s customers will likely stay with Apple for the longer term.

Chart showing Apple's price, PE ratio, and price to free cash flow rising from 2019 to 2022 and then falling.

AAPL given by Y-Charts

The 2022 bear market sent Apple shares down significantly. Investors today can buy Apple stock at a price-to-earnings and price-to-free-cash-flow ratio of 21.7 and 19.4, respectively. That’s a relatively fair price to pay for a great company. Investors will succeed in creating wealth if they can buy large companies at reasonable prices.

What did you do for me later?

Jeremy Bowman (Bear case): It’s hard to question Apple’s good faith, as the company is one of the largest in the world and generates huge margins. But stocks are generally valued based on future cash flows, and Apple’s stock may not be as strong as the market seems to think.

In Apple’s most recent quarter, revenue grew 8% and earnings per share rose only 4%. According to Wall Street, it’s not the growth stock some would like to think. Apple didn’t give specific guidance in its latest earnings report, but the company said it expects revenue to slow sequentially in the current quarter due to the environment. macro, a 10 percentage point headwind from the exchange rate and tough comparisons in the Mac Segment.

Wall Street, meanwhile, expects revenue growth of just 2.7% in the current fiscal year, and even slower growth in earnings per share. In fiscal 2024, he expects only a slight improvement in revenue and net income growth.

Apple has built a dominant consumer franchise, but there are also real risks for the company as rivals push forward with the next computing platform. Metaplatformsfor example, will spend nearly $20 billion next year to realize its vision for the metaverse, and other companies like Nvidia and Microsoft are also moving beyond the era of mobile computing.

Apple still derives more than half of its revenue from the iPhone, which was first introduced 15 years ago. And while the company has managed to raise prices for its brand of smartphones, it’s bound to hit a limit in what people are willing to pay, especially with a potentially looming global recession. Eventually the law of large numbers will catch up with her and she will run out of new customers to convert.

Finally, Apple’s services segment, which relies on its App Store, faces more legal challenges as companies balk at its 30% commission. We could see a settling of scores in the App Store Model over the next few years.

Overall, Apple’s strengths as a company are obvious, but investors may find better growth at this valuation elsewhere.

Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Jeremy Bowman holds positions in meta-platforms. Parkev Tatevosian, CFA holds positions at Apple. The Motley Fool holds positions and recommends Apple, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: $120 long calls in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.