It’s an exciting time for investors looking to buy on the dip, but getting that strategy wrong could hurt your portfolio. Apple (NASDAQ: AAPL) remains wildly popular, but you might get better results from an ETF that tracks the Nasdaq, such as the Invesco QQQ Trust (NASDAQ: QQQ). As always, the most suitable option depends on personal factors, so consider them before making a choice.
Apple is tech royalty
Apple is the largest publicly traded company in the world, based on market cap. The company has delivered steady revenue growth over the past 20 years. There have been a number of bumps along the way due to recessions and competitive conditions, but the overall trend has been sharply upward due to a series of popular consumer devices and associated software.
AAPL Revenue (TTM) data by YCharts
Apple isn’t quite reaching the same growth rates that it delivered at a smaller scale, but its most recent results were still impressive. The company reported 9% sales growth in the first quarter of 2022, and it generated $28 billion in operating cash flow during the quarter. That’s really impressive for an enormous global business with formidable competitors. With an annual R&D budget around $25 million, Apple is clearly committed to sustaining its place as a global consumer tech leader.
Apple could be a compelling play for investors who want to capitalize on the rise of virtual and augmented reality. The company doesn’t have a device on the market right now, but there are rumors that it’s launching a headset in the not-so-distant future. Apple’s potential entry into VR would be assisted by its powerful presence in the content, consumer software, and mobile device markets.
Image source: Getty Images.
Investors can buy the stock at a forward P/E ratio of 24, which is pretty reasonable at the current growth rate. It’s not the cheapest stock in the world, but investors who like the company should be comfortable with this valuation for long-term gains.
The case for owning the index
There’s a classic trade-off between owning an entire index rather than an individual stock. The best possible returns come from hitting it big with one stock. Owning an index means that the losers are dragging the winners back down to the average.
On the other hand, owning a diverse bundle means that you’ll never experience the catastrophe of one stock falling short of expectations. There are plenty of historical examples of that in action. Because the market has historically delivered solid long-term returns, most investors are better off using index funds to limit risks.
It’s unlikely that Apple will crash and burn anytime soon, for all the reasons covered above. It’s not completely implausible that its financial results could deteriorate. The iPhone accounts for more than half of the company’s sales, which opens up risk. If consumer tastes change or if competitors release a superior product, dwindling sales of that flagship product could hit the bottom line.
Even if Apple maintains market share, growth could stagnate. Some investors are concerned about smartphone saturation. Over 83% of people in the world have a smartphone, so there aren’t many untapped corners of the market left. Of course, Apple is committed to establishing itself in new product and software markets, so its fortunes won’t always be this tied to the iPhone.
Ultimately, the best argument in favor of the index centers on their similarities rather than differences. Apple is highly correlated with the Nasdaq. In fact, Apple makes up around 13% of the Invesco QQQ Trust. Many of Apple’s tech peers share its major growth catalysts, so most of the time, the Nasdaq will go as Apple goes. There’s a chance that the Cupertino tech giant breaks out above the index, but it’s going to at least partially drag the Nasdaq along with it.
AAPL, QQQ Total Return Level data by YCharts
Both Apple and the whole Nasdaq are probably winning investments for investors today. By owning the index, you can capture most of Apple’s upside while greatly reducing risk. You’ll also get exposure to a handful of exciting, successful tech leaders. Most investors should prioritize that stability.
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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. 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.
