2020 was an astounding year for tech investors. The tech-heavy Nasdaq Composite jumped 43% over this timeframe. Some tech stocks, however, performed even better than this tech-weighted market index. One worth taking a closer look at after its stunning 81% gain during 2020 is Apple (NASDAQ:AAPL). Few guessed that the world’s most valuable publicly traded company would reward shareholders with such a large gain in 2020.
Following a wildly impressive year for the tech stock, many investors are likely wondering what they should make of the stock today.
Are shares of the iPhone maker a buy, sell, or hold for 2021 and beyond?
If there’s one key takeaway from what Apple proved to investors in 2020, it’s the resilience of its business model. Even during a pandemic that closed many of its stores around the world and interrupted supplier manufacturing, Apple’s business continued to grow.
In Apple’s fiscal third quarter (a three-month period that ended on July 30), the tech giant posted revenue of $59.7 billion — up 11% year over year. On average, analysts were expecting revenue to decline during the period. Yet Apple delivered revenue growth across every product segment. So much for weak demand during a global pandemic. Even during the April 30-ended quarter, when some of Apple’s suppliers faced challenges and interruptions to their operations, revenue grew 1% year over year and earnings per share increased 4%.
If demand for the tech company’s products has been negatively impacted this year, it’s hardly noticeable. It turns out that Apple’s products have become more of a necessity than a luxury for many people around the world.Â
While Apple’s top-line growth during difficult times has been impressive, it understates the company’s underlying momentum.
A breakdown of Apple’s segment revenue reveals one standout segment growing more rapidly than Apple’s overall revenue: services.
Apple’s services revenue in fiscal 2020, for instance, increased 16% year over year. A surface-level look at the segment may lead investors to miss its importance to Apple’s business. Though it accounted for just 20% of fiscal 2020 revenue, it’s notably a higher-margin business than Apple’s product revenue. Gross profit margin for services in fiscal 2020 was 66%. This compares to product gross margin of 31%.
Not only is Apple continually investing in expanding services and launching new ones, but this thriving services segment is making the company’s ecosystem of hardware, software, and services increasingly “sticky” for its customer base. Services like Apple TV+, Apple Pay, and AppleCare, in addition to the immense value of the App Store, play important roles in customer retention.
Apple’s fast-growing and lucrative services segment will likely be a major growth catalyst for Apple over the long haul.
A pricey valuation
Despite these reasons to be optimistic about Apple, there’s one problem: the stock is expensive. Apple currently commands a price-to-earnings ratio of 40. This means investors have essentially priced in strong growth from the tech giant for years.
With a valuation like this, I’d rather wait for a 10% to 15% dip to buy shares of this tech giant — no matter how strong its business is. Sure, there’s a chance that dip will never come. But the current valuation leaves very little room for error when it comes to Apple’s execution over the next 10 years.
On the other hand, this doesn’t mean I would rush to sell shares if I owned the stock today. Given Apple’s strong business performance, shareholders may want to give the company a chance to continue delivering value for its shareholders. Of course, it may be a bumpy ride. But a rapidly growing, high-margin services segment, as well as resilience across Apple’s hardware segment during a challenging year, capture what makes the company’s business so compelling — and why Apple will likely continue to do well over the next five to 10 years.
So, is Apple stock a buy, sell, or hold after its enormous run-up last year? I’m going with “hold” — at least for the shareholders willing to endure significant volatility over the next five-plus years.
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