The iPhone maker is home to a lucrative services business worth investing in.
Apple (AAPL -2.78%) investors have been on a roller coaster in recent years, with an economic downturn bringing the iPhone maker's stock plunging 27% in 2022. The company's shares rebounded 48% the following year. However, repeated hits to its business and revenue declines throughout 2023 have seen its stock dip 1% since the start of this year.
Wall Street has grown wary of Apple's iPhone-dependent business as macroeconomic headwinds caught up with the company, leading to a decline in product sales. However, recent quarterly results and moves to prioritize more digital businesses suggest the company is moving in a better direction.
Apple's digital services segment consistently outpaces the iPhone and is on track to become its highest-earning division. Meanwhile, a gradual expansion into artificial intelligence (AI) could see the company profit from the tailwinds of a $200 billion (and growing) industry for years. As a result, now could be the best time to invest in Apple, as it is at the start of a major shift in its business model.
So, here are three reasons to buy Apple stock like there's no tomorrow.
1. A highly profitable services business
Apple's services segment includes income from its App Store and subscription-based platforms like Apple TV+, Music, Fitness+, and more. The bulk of the company's services launched in 2019, and the division quickly became the most profitable part of Apple's business.
Services regularly hit gross margins above 70%, achieving 75% in the second quarter of 2024 (a year-over-year improvement of about 4%). For reference, products' profit margins hover around 36%.
Moreover, its services consistently outperform those of Apple's other segments. Q2 2024 saw revenue for the digital business rise 14% year over year, while iPhone sales fell 10% and iPad revenue tumbled 17%.
Services have diversified and strengthened Apple's business, allowing it to lean less on product sales amid poor market conditions. The segment is expanding rapidly, illustrating a promising shift in Apple's priorities from physical offerings to its more profitable digital products.
2. The brand power and financial resources to go far in AI
Despite recent challenges, Apple remains a behemoth in consumer tech. Thanks to nearly unrivaled brand loyalty, the company dominates multiple product markets, with leading market shares in smartphones, tablets, smartwatches, and headphones. Sales have dipped over the last year, but the company is making moves to boost its product business with AI.
Apple has gradually added AI-enabled features to its product lineup since the start of 2023, but now it appears to be quickening the pace. On May 7, the company hosted its "Let Loose" event, where it debuted its newest iPad Pro -- the first device powered by Apple's new M4 chip.
The chip is Apple's most powerful one yet, considerably expanding the company's AI capabilities. The launch appears to be a preview of what Apple will reveal at its Worldwide Developer Conference in June, where experts believe it will debut a range of new AI-powered tools.
Moreover, Bloomberg reported last month that Apple plans to overhaul its Mac line of computers to focus on AI and is powering its AI software with data centers filled with in-house-designed chips.
Apple's dominance in consumer tech could land it a lucrative role in AI. While companies like Microsoft and Amazon are primarily focused on the commercial side of AI, Apple has honed in on consumers. The widespread use of its products could see Apple become a significant growth driver in the public's adoption of AI, improving its recent product slump and boosting revenue for years.
3. A record $110 billion share buyback plan
On May 2, Apple announced the biggest stock buyback in history, revealing plans to buy back $110 billion worth of stock. The move saw shares in Apple pop 8% in after-market trading, instilling some confidence in investors for the company's future.
Buybacks often occur because executives believe the company's stock is undervalued. As a result, a major buyback could be a sign that management believes in the direction Apple is moving in, making its stock an attractive option.
Apple has faced more than a few challenges over the last year, but I wouldn't bet against its long-term future. Its stock is trading 29 times its forward earnings, compared to Microsoft's 35 times and Amazon's 40 times. It may not be a bargain, but the figures suggest Apple could be one of the best-valued stocks in AI. Alongside a lucrative services business, Apple is worth buying like there's no tomorrow.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
