Back in 2017 when I was building my first PC, I had gotten myself in a deep rabbit hole learning about various computer components and the companies behind them.
It was through this process that I learned of Nvidia’s dominance in not only gaming, but the professional GPU space along with their role in AI.
This knowledge made me recommend my family to buy Nvidia stock (NVDA) and it would become one of, if not the best investment decision our family has made.
Somehow, one single stock propelled our investment balances to the point that our bank has considered us high-net-worth clientele.
The investment rationale was simple.
People bought Nvidia GPUs because they were the best option regardless of if you were a CAD professional, video editor, gamer, or even if you were on a budget at the time. As long as Nvidia remained as the first and best choice, it was a buy-and-hold.
It is through a similar lens that I want to view Apple stock (AAPL) and the tariff environment.
Yes, tariffs could significantly harm Apple’s business and there have been signs of stagnation in its hardware sales, which some have pointed to as a lack of innovation from the company that will hurt the stock.
However, we must ask ourselves whether these headwinds truly change the fundamentals of the company.
Is there anything happening that suddenly makes Apple products lower quality than they once were or suboptimal compared to their peers?
I’d argue that there’s very little.
Apple products are still among the best in their class, and its highly profitable service revenue growth is indicative that people are not so much shifting away from Apple, but rather just not upgrading their devices as frequently.
As long as Apple keeps people in its product ecosystem, it has a strong financial moat to weather the volatile economic environment and navigate crises.
That said, Apple is still navigating a difficult economic environment, and they don’t have any major, game-changing tailwinds, which makes valuation much more important.
While I am bullish on Apple’s ability to produce its past five-year average free cash flow (“FCF”) growth rate of 20% over the longer term, investors should apply a larger margin of safety for this company and invest when prices make more sense. At its current price point of $202.14 (at the time of writing), I rate Apple a Hold, but I would recommend buying whenever Apple falls below $180 under the assumption of a 15% FCF growth rate discounted at 11%.
The Strength of Apple’s Ecosystem
I remember when I first became interested in building a computer, Apple Macs had a reputation for being well-built, but had extremely weak price-to-performance.
The only reasons you would buy an Apple computer at the time were if you didn’t care at all about the specs and had deep pockets, or your specific workload required an Apple product.
This narrative, however, has changed drastically.
In 2020, Apple announced its plans to switch its Mac computers from Intel processors to in-house developed Apple silicon processors, and it is one of the greatest decisions the company has made.
The company’s computers went from being overpriced products few people considered to high-performance computers with phenomenal build quality that have even become valuable budget picks in the case of the MacBook Air.
It is quite amazing to see how many tech review sites and influencers rate the MacBook Air as the best overall laptop today compared to years ago when Apple laptops were only mentioned as a part of ratings exclusive to Apple computers.
I myself experienced this shift firsthand as a consumer.
Before 2021, I was very much a non-Apple user. My phone was a Samsung Galaxy S8, I wore a Fitbit, my earphones were some random brand I found in China, and I used a six-year-old HP laptop whenever I was not on my custom-built Windows PC.
During 2021, however, my new job position required me to travel frequently, and my dated HP laptop that had to be plugged in the whole time just wasn’t cutting it anymore.
Thus, I began my laptop search.
At $1000, the M1 MacBook Air was impossible to beat. There was nothing on the market that offered better performance, battery life, or build quality at that price point.
But what I didn’t realize was that this laptop purchase would lead me to purchase more Apple products and become integrated into their ecosystem. In the same year, I ended up switching to an iPhone 12, an Apple Watch, and a pair of AirPods. These were purchases I didn’t regret at all, as they paired amazingly well together.
Apple’s value proposition still remains the same today as it did when I was buying a new laptop four years ago.
The company’s new M4 chips have continued to deliver, and Apple’s M4 MacBook Air has continued to be described as the best overall laptop you can get.
It’s not just the MacBook Air either.
Other computers from the Mac lineup as well as Apple’s iPads have been performing exceptionally well on a technical level. Power draw is extremely low for the performance you’re getting, and the price point of these devices has become more attractive as Apple doesn’t pay hefty sums to companies like Intel and AMD to use their processors and GPUs.
This begs the question, “Why then, has Apple’s hardware sales been stagnant?”
Between Apple’s 2023 and 2024 fiscal years (“FY”), sales across their devices saw minimal improvement. iPhone sales saw a 0.3% increase, Mac sales saw a 2.1% increase, iPad sales saw a 5.7% decrease, and Apple’s Wearables, Home and Accessories category saw a 7.1% decrease in sales. Overall, Apple saw an decrease of 1.1% in its device sales between FY 2023 and 2024.
Image From Apple 2024 10-K | Sales By Products 2022–2024
As backward as it sounds, this stagnation in sales is a result of Apple’s products becoming too good.
If it weren’t for me accidentally cracking the back of my phone and not accounting for the fact that I would begin using my laptop, which has only eight gigabytes (“GB”) of RAM, for more heavy workloads such as video editing, I would have never considered upgrading any of my Apple devices.
In fact, upgrading is only a consideration and not really necessary at this point. My phone still works well despite the crack, and my laptop is actually able to fulfill my video editing needs, just not as smoothly as I would like.
It’s a similar story with many others. When my brother was entering his first year of university, for example, we opted to purchase the same M1 MacBook Air that I have, despite the M2 chips already being out. My brother has also only upgraded from his iPhone 8 this year, and my father is still using his iPhone X without issue.
Although this stagnation of sales and the lack of people upgrading their devices can also be attributable to Apple’s lack of creating life-changing products recently, it’s not as much of a problem due to their service sector.
Between FY 2023 and 2024, Apple’s service revenue saw an increase of 12.9%, and more importantly, its service revenues have a gross margin of between 70 and 73% in the last three years, compared to the 36–37% in product sales.
This is a big part of Apple’s financial moat. Tariffs may affect sales and/or margins on Apple’s hardware products, but the company’s service sector is less affected.
So as long as Apple’s ecosystem remains a desirable place to be for consumers, the service sector will only continue to grow in importance as people look to increase their storage via iCloud and continue building new apps for the App Store.
Image From Apple 2024 10-K | Gross Margin Comparison Between Products and Services
On top of a strong service sector, Apple is also by no means in a financially rough situation. The company has $30.30B in cash and another $23.47B in short-term investments that will help it navigate any possibilities of moving its supply chains.
Apple has also had positive free cash flow for many years now, and could always adjust things like share repurchase programs and dividend payments if the company really needed to.
Chart From Seeking Alpha
The Tailwind Amidst the Headwinds and Valuation
Of course, we cannot dismiss the headwinds that Apple faces. Though tariffs will impact Apple’s bottom line, they are constantly changing and not great to base any long-term investment analysis on.
It’s not an exaggeration when I say that I have woken up to new tariff changes every day for the past two weeks.
The real problem with Trump’s tariffs affecting Apple’s long-term performance is that it has hurt the U.S.’s relationship with a considerable part of the world. Apple’s sales in China have already been slipping, and I expect it to continue falling as Trump’s economic policies make it even more challenging to do business globally.
Image From Apple 2024 10-K | Revenue By Geographic Region
Apple’s other headwind is its weak innovation recently. Apple’s products have been great, but the other side of the coin is that few people have seen their new products as must-buys compared to older versions.
Additionally, Apple’s projects, such as its self-driving car, have been scrapped, and its Apple Vision Pro has been mostly a flop. With these headwinds in mind, I wouldn’t necessarily bet on Apple maintaining its past five-year FCF growth rate of 22.12%.
But amidst these headwinds that Apple faces, there is one tailwind that does stand out.
Although Apple Intelligence has not seen a particularly strong launch, there is a part of Apple’s role in AI that can be seen as a tailwind for the company.
This part is the recent launch of the M4 chips alongside the M3 Ultra, and it’s the possible 512 GB configuration in the M3 Ultra Mac Studio that is particularly interesting.
Numerous influencers have demonstrated that the M3 Ultra Mac Studio runs DeepSeek AI models particularly well with extremely low power use compared to alternatives.
And though a price of approximately $10K is not cheap, the M3 Ultra Mac Studio with 512 GB of RAM does come at a much more attractive price point compared to various Nvidia H100 cards that usually start around $30K each.
For large-scale enterprise AI development, Nvidia cards will still remain the best choice, but I do see a world where small business AI development companies may opt for a Mac-backed setup due to the more efficient cost and power draw.
This is a little bit of speculation, but what has remained as a fact is that the new M4 chips are very good as seen by Apple’s 16% increase in Mac sales during Q4 2024 compared to Q4 2023.
Image From Apple Form 10-Q | Apple Q4 2024 Vs. Q4 2023 Revenue By Segment
Thus, regarding valuation, I assumed a 15% growth rate in Apple’s FCF YOY, discounted at 11% to arrive at a price target of $180.91. Apple’s financial moat is strong, and the company’s products remain as some of the best in the world.
That said, the company does seem to have slower innovation and macroeconomic headwinds, which is why I have adjusted Apple’s FCF growth rate down from its five-year average of 22.12%.
DCF Model From Author Using Seeking Alpha Data
Image From Author Using Seeking Alpha Data
Conclusion — Buy On Dips
With a solid brand image and continued growth in its service sector, Apple is a company that is still worth investing in.
Valuation, however, is important as the company does face macroeconomic headwinds and has not been particularly innovative as of late.
Based on a discount rate of 11% and a 15% growth rate in Apple’s FCF, Apple is a buy whenever the price dips below $180.91.
I expect market volatility to remain high and opportunities to buy Apple at lower prices in the near term as the U.S.-China trade war continues ramping up.
This economic environment and any downturns are merely opportunities for long-term investors to buy great companies at better prices.
Of course, don’t solely rely on my analysis, though. Here are five other different perspectives on Apple stock on Seeking Alpha published in the last week.
- “Apple: Overvalued And Overexposed To Tariffs Risks” — Dair Sansyzbayev (Strong Sell)
- “Investors Are Missing The Point: Apple’s Fundamentals Are Cracking” — Livy Investment Research (Sell)
- “Tariffs… Yes, No Or Maybe: Regardless, Apple Still Has An Identity Crisis (Downgrade)” — Marc Gerstein (Hold)
- “Apple: Trump Blinked First And That Presents An Opportunity” — Everyday Options (Buy)
- “Apple: Minimal Impact From Upcoming Tariffs On Semiconductors” — Deep Value Investing (Strong Buy)
Financial Disclaimer: The views in this article are the author’s personal views. This commentary is provided for general informational purposes only. It does not constitute financial, investment, tax, legal, or accounting advice or an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this article should consult with their advisor. The information provided in this article has been obtained from sources believed to be reliable and is believed to be accurate at the time of publishing, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Investing in stocks, bonds, exchange-traded funds, mutual funds, and money market funds involves the risk of loss. Their values change frequently, and past performance may not be repeated.
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