Apple‘s (NASDAQ: AAPL) stock has been on fire this year (and over the past several years). The company has shown a keen ability to refresh legacy products like the iPhone, iPad, and its family of Mac computers in ways that keep consumers loyal to its brand.
The coronavirus pandemic fueled consumer demand for its products as hundreds of millions of folks worldwide started working, learning, and entertaining themselves at home. Apple’s stock is hitting record highs; let’s see if it can climb even higher.
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Apple’s products are a gateway to the ecosystem
Fueled by the launch of new products, Apple’s revenue surged an impressive 33% in 2021 from a base of $275 billion in 2020. That 33% revenue growth represented $91 billion more in sales year over year. The jump went a long way in assuaging investors who are concerned that the company will find it hard to grow revenue at a meaningful rate given the altitudes it has already reached.
Furthermore, Apple generates healthy profits from its sales of products and services. The latter is more profitable, with a gross profit margin of 70.5% in its most recent quarter ended Sept. 25. Apple’s services segment boasts a whopping 745 million paying subscriptions, up more than 160 million from the year prior.
Apple’s products segment reported a gross profit margin of 34.3% at the same time. Several companies with as robust a services segment as Apple’s are envious of its ability to sell products at such high gross-profit margins — just ask Roku.
Products are the gateway to Apple’s ecosystem. Once consumers buy an iPhone or iPad, they are more likely to subscribe to Apple Music. Once subscribed to Apple Music, a consumer customizes the experience, raising the probability that when it’s time to upgrade, they will choose another iPhone. In that regard, shareholders should be thrilled that Apple’s products’ sales increased to $297 billion in fiscal 2021, up from $221 billion in 2020.
Apple’s stock price is expensive right now
Apple’s strong results have gone a long way in lifting its stock price. Indeed, it’s up 32% year to date in 2021 and 315% over the last three years. The stock is at record highs and has some investors asking if there is any room left for it to go higher. After all, Apple’s market cap is now an incredible $2.88 trillion.
Apple’s valuation metrics appear to be stretched right now. It’s trading at a price-to-free-cash flow of 31.95, which is near its high point in the last decade. Similarly, its forward price-to-earnings ratio of about 30 is the highest it’s been all year.
Still, Apple’s demonstrated ability to innovate through product cycles, a growing subscription base, and strong customer loyalty could lead its stock higher over the long run, even if it’s on the pricier side right now.
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Parkev Tatevosian owns Apple and Roku. The Motley Fool owns and recommends Apple and Roku. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
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