The largest company in the world by market capitalization, Apple (NASDAQ:AAPL) certainly gets its fair attention. This year, Apple stock has actually performed extremely well. In a market that appears to be indecisive, investors are fleeting to safety. In the world of tech, Apple is about as safe as it gets.
Thus, this view that Apple could continue to outperform from here is relatively easy to understand. Apple is valued by consumers and investors because of its brand power and incredible customer loyalty. Few companies have built out a product ecosystem like Apple that reinforces itself with ever-increasing sales. Thus, from a product and services standpoint, there’s a lot to like about Apple.
That said, I think there’s one factor investors ought to consider with Apple stock that may be getting lost in the discussion right now. Here’s the one key catalyst I think investors should be paying attention to right now with Apple.
iPhone Super Cycle a Big Deal Apple Stock
For years, talk of a so-called iPhone super cycle has boosted Apple stock.
The idea is relatively simple. Because Apple consumers are so loyal to their brand, and will not switch, eventually everyone will upgrade their phones. I have to admit; I find myself in this category of consumer, looking for the best time to upgrade, based on a variety of factors.
Bears have contended that iPhone generations are basically the same. The level of innovation in terms of product upgrades is diminishing with each new release. Thus, there’s less of an incentive for Apple users to switch to the latest iPhone, if their previous model is still working well.
That’s fair, and there’s still a relatively sizeable chunk of iPhone users that are in this camp. But over time, as phones crack, break, and battery life diminishes (that’s a fact for any device with a battery), an upgrade will take place. Bulls have been right over the long-term in assessing that iPhone users remain sticky, and will continue to buy newer (and more expensive) phones.
This Factor Has Led to Strong Fundamentals
In order for Apple’s core iPhone business to continue to grow, the company needs to do two things. Apple needs to grow its market share and entice existing users to upgrade their phones. The company’s results paint a rather beautiful picture that this is exactly what’s happening right now.
Apple stock has surged partly because of valuation expansion this year and partly because because of fundamentals.
At first glance, Apple’s Q1 earnings release in February wasn’t much for investors to get excited about. Revenue was down 5% year-over-year, and earnings came in at $1.88 per share, implying a trailing price-earnings ratio around 28-times.
However, the company did note that it hit a new milestone, in 2 billion connected devices in its installed base. Apple stock saw some interest from investors on news the company’s services business outperformed, growing to 18% of the company’s overall sales.
Thus, investors appear to be focusing less on the company’s iPhone super cycle, and more on its growing services business. With gross margins of 70.8% in services and “only” 37% in its products category, this makes sense. That said, it’s also clear that iPhone sales drive revenues and profits for the company, so this will be a key segment to focus on long-term.
Wrapping It Up
As one of the big tech giants, Apple has shown its ability to be resilient and deliver strong returns. In any environment, I think it’s safe to own Apple stock, partly because of the ongoing iPhone super cycle driving its overall business.
As Apple transitions more of its earnings toward its services business, margins should expand further. That provides an easy-to-understand investing thesis for all.
On the date of publication, Chris MacDonald has a position in AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.