Is Apple to buy, sell or hold in 2025?

Investors have a lot to celebrate this year, with S&P 500 earning 20%. While it’s nice to receive big returns, it’s also a good time to review your holdings before the new year.

Applehis (NASDAQ:AAPL) the stock has underperformed the market by 2 percentage points year-to-date, up 18.3%. However, the company has been very successful in the past and has richly rewarded shareholders. After all, the company has a market cap of $3.5 trillion, one of the few to break the trillion dollar mark.

Can Apple stock regain its market-beating ways? The answer lies in examining the company’s long-term outlook and valuation.

Can a new phone revitalize sales growth?

Apple’s iPhone accounts for a large portion of the company’s sales. In the first nine months of the fiscal year, which ended June 29, the product accounted for 52 percent of Apple’s top line of $296.1 billion.

Faced with increasingly intense competition, including from China-based Huawei, iPhone sales fell in the most recent quarter, falling 1 percent to $39.3 billion.

More worryingly, the product has also lost market share. Apple’s iPhones accounted for 15.8 percent of smartphone shipments in the second quarter, down from 17.3 percent in the previous quarter. A year ago, it held a 16% share.

Apple recently released a new version of the iPhone that it hopes can reverse the trend. It has new features including artificial intelligence (AI) capabilities. However, it remains unclear whether this will prompt existing customers to upgrade to expensive models or prompt users to switch to an iPhone. It’s too early to make a judgment call on how the new features will impact the top line. Although initial sales were disappointing, investors should have more information when Apple reports quarterly earnings in about a month.

Can services support growth?

A bright spot for Apple remains sales from providing services. These include advertising, support products, cloud services, the App Store, and payments.

In the last quarter, sales of services rose 14.1% to $24.2 billion. And this category has a much higher gross margin than products, 74% versus 35.3%.

However, the US government and several states have argued that Apple’s iPhone holds an illegal monopoly that makes it too difficult for consumers to switch phones and develop apps. This could lead to a prolonged trial and the outcome remains uncertain. The cases have the potential to hurt the profitability of Apple’s services business.

The story continues

Meanwhile, after a lack of new product categories, Vision Pro, its much-hyped product launched earlier this year, doesn’t seem to have gained much traction. With a high price tag for the combined augmented and virtual reality headset, sales seem to have been disappointing. Management now expects to sell 450,000 units in the first year, well below its original estimate of 800,000.

Decision

The stock’s gain over the past year has led to a richer valuation. Apple shares have a price-to-earnings (P/E) ratio of 34, up from about 28 a year ago.

The stock is also selling at a higher multiple than that S&P 500P/E of 30, which makes it more expensive than the general market. The S&P 500 makes a good comparison because it is composed of large-cap stocks.

A higher valuation might seem warranted if Apple had better-than-market growth expectations. However, its main product, the iPhone, has been in decline, and it is unclear whether its new version of the phone can stop this slide. The new AI feature doesn’t appear to provide a long-term competitive advantage, as others seem likely to incorporate something similar quickly.

Coupled with a government investigation and unclear prospects for its newest product, I’d stay away and sell any Apple stock you own.

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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.

Is Apple to buy, sell or hold in 2025? was originally published by The Motley Fool