Technology

The Services Business Is Making Apple Stock a Safe Bet

Chris Lange

Apple Inc. (NASDAQ: AAPL) stock has been an incredible contributing factor for the stock market’s recovery over the past month. Many consider Apple as a bellwether for the stock market, and its performance has provided optimism for many investors.

Over the past month, this tech giant has been a top performer in the Dow Jones Industrial average, with its stock price up over 17%. Apple’s trillion-dollar market cap also has been a tremendous contributing factor to the S&P 500 and its recovery in this time as well. Shares of Apple are up nearly 68% from this time last year, if that says anything.

Although the coronavirus pandemic will hurt Apple for several quarters, Apple’s outlook in the long-term appears to be unshaken. The near term may be rocky, as the pandemic has already hit the company, which has shuttered retail stores in many parts of the world. However, many investors are now choosing to evaluate companies based on next year’s projections, completely writing off this year.

Again, the near term will be tough, but Apple is starting to realize more growing streams of revenue in this time. iPhone sales may be in trouble, but Apple Watch and Services Business revenues are acting as a counterbalance.

Apple’s Service Economy

Perhaps the biggest hit in Apple’s most recent quarterly report was the growth in its Services Business. Ultimately, it was a record quarter for this segment, and Apple is only expanding it from here. The potential for growth is incredible.

In terms of the numbers, the Services Business contributed to 23% of all of Apple’s revenues for the quarter. The segment saw revenue growth of 16.6% year over year to a total of $13.35 billion.

In mid-April, Apple announced that it would be expanding its services business to 20 additional countries. This means Apple’s most popular services (the App Store, Apple Arcade, Apple Music, Apple Podcasts and iCloud) will be available across even more new markets. This is especially important for Apple Music, because the service expands its reach by 52 new countries.

Note that after this expansion is completed, the App Store will conduct business in 175 countries and regions. Currently, the App Store sees half a billion people access it each week.

Apple TV

Apple TV is making a name for itself among the Services Businesses, but it faces a lot of competition. Apple TV+ recently was launched with a monthly subscription fee of $4.99. That puts it below its primary competition: Amazon Prime, Netflix Inc. (NASDAQ: NFLX) and Walt Disney’s (NYSE: DIS) Disney+.

Looking at the competition, note that Netflix has over 150 million worldwide subscribers, and Amazon Prime has over 100 million. Disney recently rose to about 50 million, two years ahead of the schedule it set.

Here’s something that may hold back Apple’s services business. Apple+ does not have its own major studio operations, at least not yet. Richard Plepler, who was CEO of HBO, signed a multiyear deal to produce original content. As the service launched, Zack Van Amburg, Apple’s head of Worldwide Video, said, “With Apple TV+, we are presenting all-original stories from the best, brightest and most creative minds, and we know viewers will find their new favorite show or movie on our service.”

Safety in Numbers

One major contributing factor to Apple’s security as an investment (and why many investors buy Apple stock) is its annual dividend. A few other important numbers offer security to investors as well.

Apple’s board of directors recently declared a cash dividend of $0.82 a share of the company’s common stock, an increase of 6%. This quarterly dividend will be paid on May 14, to shareholders on record on May 11. The annual dividend yield is roughly 1.0%.

Apple’s price-to-earnings ratio (P/E) on a trailing 12-month basis is 24.3, which is a little expensive, all things considered. However, Apple deserves this premium after years of outperformance. Also, with shares only 5% off all-time highs, this premium makes more sense. The P/E based on fiscal 2020 estimates is 26.2.

Perhaps the biggest appeal Apple has to investors is the strength in its balance sheet. The iPhone giant has a huge advantage over practically every company in the world. This is more important than ever, with investors looking for companies with quality balance sheets.

At the end of the most recent quarter, Apple’s current assets included $40 billion in cash and cash equivalents and $53.9 billion in marketable securities. Among noncurrent assets, it had $98.8 billion in marketable securities.

Note that cash generated from operations last quarter totaled $33.5 billion. Apple is rapidly adding to one of the largest company cash piles in the world.

Apple is taking this cash and paying out dividends, as previously mentioned, and buying back a significant amount of stock. Apple announced a share buyback plan for $50 billion in its most recent report. Note that this buyback plan is bigger than the individual market caps of roughly three-quarters of the S&P 500.