To The Moon

KEY POINTS

• Apple reported a year-over-year decline in revenue last quarter, driven by lower sales of the iPhone.
• Services and iPad revenue grew, showing the value of the tech titan's diverse business.
• Apple is expected to announce its first new product in nearly a decade.

Shares of Apple delivered wealth-building returns for investors over the past decade. If you had bought $1,000 worth of Apple stock when the iPad launched in 2010, you would be sitting on $20,230 today. And that's after a 15% stock price dip last year.

While Apple still has many opportunities ahead, with new products and a growing installed base of devices, the company posted a decline in revenue in the quarter that ended in December. This performance might have some investors wondering if one of the world's top brands is truly a safe stock to hold if the economy dips into a recession, as some experts are predicting.

However, there are more reasons to consider buying Apple stock this year than avoiding it.

The value of Apple's diversified product lineup

The possibility of a recession seems like a problem for the sales of expensive tech products. A recession would likely hurt Apple since the iPhone makes up about half of its annual revenue. Macroeconomic headwinds played a key role in sending iPhone revenue down 8% year over year in the fiscal first quarter.

Management attributed the decline in iPhone sales to foreign currency fluctuations, supply constraints, and macroeconomic headwinds like inflation. Excluding foreign currency, iPhone revenue would have been flat versus the year-ago period.

But in a quarter where iPhone struggled, other categories did well. iPad revenue grew 29% year over year, making up 8% of Apple's sales. Services, including app sales and subscriptions, increased 6% year over year, accounting for 18% of total revenue.

The beauty of Apple's business is that it has a dedicated customer base that loves their iPhones. The tech giant created a seamless integration of hardware and software that leads to consistently high customer satisfaction. Apple's iCloud keeps the apps running on Macs, iPhones, iPads, and Apple Watch all in sync, which has been a key incentive for customers to buy at least two devices, leading to a diversified revenue stream.

Apple now has a massive installed base of over 2 billion devices, which is double the level from seven years ago. This sets up the company with a few growth catalysts in 2023.

Growth catalysts are forming for Apple

After years of speculation and rumors, Apple is finally expected to unveil its mixed-reality headset this year, featuring virtual reality (VR) and augmented reality (AR) technology. Bloomberg reported in February that the company postponed the announcement until June at Apple's Worldwide Developers Conference.

One reason this is big news is that Apple's customer base is likely much larger today than when the company's last new product, Apple Watch, launched eight years ago. This means a novel product launch might have more impact on revenue than previous product releases.

Still, a successful debut will depend on the quality of the software and ease of using it, not to mention the price. But Apple's focus on hardware and software design could make its rumored headset a breakthrough AR/VR product.

Excluding the possibility of a new product launch, the company's expanding installed base is a good enough reason to consider holding the stock. The growth in higher-margin services revenue is gradually becoming a greater contributor to the top line. Over time, this will help smooth out the occasional dips in revenue from Apple's hardware products, giving it a better recurring revenue stream besides relying on iPhone upgrades.

Apple stock is a buy

Apple has a fortress-like balance sheet, with $64 billion of net cash. It also generates around $100 billion in free cash flow every year, so it has plenty of resources to fund growth initiatives and pay dividends to shareholders.

Looking at valuation, Apple's price-to-earnings ratio of 25 based on this year's earnings estimates is not cheap, but it is fair compared to the shares' recent trading history and other blue chip stocks. Overall, I wouldn't want to sell Apple stock considering the upcoming catalysts that may not be fully captured in its valuation.