With a market capitalization of $3.7 trillion, Apple (AAPL -0.11%) is the largest company in the world. Meanwhile, most investors own the stock either directly or indirectly through exchange-traded funds (ETFs) or mutual funds that track major market indices. After all, the company is the largest component of both the S&P 500 and Nasdaq-100, two of the most popular indexes that people invest in through funds that track their performances.

Against that backdrop, let's look at the buy and sell cases for Apple stock.

The buy case

Apple didn't become the largest company in the world by accident. It created a strong luxury brand, which is something few companies have been able to do in the consumer electronics space. While other brands long ago caught up in technological innovation, Apple is still widely viewed as a premium brand due to the aesthetic design of its devices and their trouble-free operation.

Just as importantly, the company created a closed-loop system that seamlessly connects its devices and keeps its content within its walled garden. While the company would say this type of control makes for a better user experience, it also makes Apple's products very sticky with customers. While it's possible to transfer photos and other files to an Android device from an iPhone, it will take some work, while any premium apps would need to be repurchased.

This means that Apple tends to have a locked-in user base. The iPhone remains the company's main product, accounting for 56% of its total revenue last quarter and 71% of its product sales. The company benefits from a natural iPhone replacement cycle, as battery life starts to wane for older phones and users upgrade to the latest technology from the company. While the company is selling products, there is a recurring-type nature to the business.

Meanwhile, the most important part of the company's business has been its service segment. This segment includes revenue generated from its App Store, cloud storage, subscriptions like Apple TV, Apple Pay, and revenue from Google search. While product sales growth has been pretty lackluster, its service revenue has been growing nicely, including rising by 14% last quarter. The segment has much higher gross margins than its products (75% versus 39% last quarter), which leads to solid profitability growth.

Apple has a chance to increase iPhone sales as its version of artificial intelligence (AI), Apple Intelligence, is introduced to more countries and in more languages. It also just introduced a new lower-cost AI model, the iPhone 16e. But the real beauty of the Apple model is its ecosystem. This ecosystem is alive and well, as shown by its strong service segment results.

Image source: Getty Images.

The sell case

While Apple climbed to become the largest company in the world, much of that has been due to its stock seeing multiple expansion, not due to strong growth. Its trailing price-to-earnings (P/E) ratio climbed from around 12 times in 2016 and 2019 to nearly 39 times today. Meanwhile, over the past two fiscal years, its overall revenue declined by 1%.

AAPL PE Ratio data by YCharts.

The iPhone replacement cycle has been lengthening, while it does not appear that the predicted AI-powered smartphone upgrade cycle is materializing. According to recent polls, U.S. smartphone users generally see little added value in AI features on their phones, and many are unwilling to pay for AI features.

In addition, the company continues to struggle in China, where it lost share to local Chinese competitors. The lack of Apple Intelligence in China has hurt sales as well, although it just announced that it will team with Alibaba to bring the AI features to its devices.

At the same time, Apple faces the potential risk of what happens with its very high-margin Google revenue-share money. An antitrust case against Alphabet largely centered around its and Apple's exclusive search deal, where Alphabet would share revenue with Apple that was generated from searches emanating from Apple's Safari browser. This was estimated to be around $20 billion in 2022 and likely has only grown since. Meanwhile, nearly all that revenue would fall to Apple's bottom line.

If Alphabet's payments to Apple have risen to $24 billion, that would be over 20% of Apple's fiscal 2024 operating income. That's a lot of profits at risk. What happens with this agreement is largely unknown, and how much revenue-sharing Apple would be able to get without an exclusive agreement is also uncertain. It is unlikely all this revenue would disappear, but this is a big uncertainty the company faces.

The verdict

With most individual investors likely owning quite a bit of Apple shares indirectly through index funds (it's about 7% of the S&P 500), I wouldn't be looking to add more shares. While Apple is a good company, the stock is pricey for its growth profile, while there is potential risk down the line with its Google revenue-sharing money that it gets from Alphabet. I'd stay on the sidelines.