Apple is still my favourite company in the S&P 500, here’s why

Apple recently unveiled a lot of new software at a developer conference. Here’s why the tech giant is still my favourite company in the S&P 500.

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Apple‘s (NASDAQ:AAPL) recent Worldwide Developers Conference (WWDC) was an affirmation of why the tech titan remains my favourite among S&P 500 companies. It offered ground-breaking advancements in artificial intelligence (AI) and innovative software updates. And I think the latest announcements solidify its position as a forward-thinking powerhouse, continuing to shape the future of technology.

Entering the AI race

One of the most significant revelations from WWDC was that the company would finally join the AI frenzy, with the announcement of Apple Intelligence. This ambitious initiative promises to integrate AI capabilities seamlessly into core products, including Mac, iPhone, and iPad. By harnessing the power of AI, management aims to enhance user experiences, streamline workflows, and unlock new realms of productivity and creativity.

The decision to collaborate with OpenAI, the company behind the revolutionary ChatGPT, demonstrates a commitment to staying at the forefront of technological advancements. By allowing users to tap into ChatGPT’s capabilities through Siri, Apple is empowering its 2bn or so customers with cutting-edge AI tools.

Software excellence

Software prowess shone brightly at WWDC. The unveiling of iOS 18, the latest iteration of its mobile operating system, promised a slew of enhancements and new features that I expect will elevate the user experience on iPhones. Similarly, updates to watchOS, iPadOS, macOS, and tvOS underscore the commitment set out by the late Steve Jobs to continuously refine and improve its ecosystem of devices and services.

On a slightly less serious side, the unveiling of custom emoji creation, dubbed ‘Genmoji’, demonstrates Apple’s ability to blend cutting-edge technology with fun and creativity. Such innovations not only delight users but also reinforce the firm’s position as a trendsetter in the tech industry.

The balance sheet

These innovations are underpinned by an incredibly strong balance sheet. Earnings are forecast to grow by about 6% per year. Admittedly not hugely impressive, but in a time of economic uncertainty, this reflects the company’s ability to keep growing while competitors struggle.

Earnings growth over the past five years is solid, with a 14% compound annual growth rate. This consistent financial performance, coupled with ample cash reserves, positions the business to continue investments in research and development.

Risks

Admittedly, there are a few areas that concern me. A discounted cash flow calculation (DCF) suggests that the stock is trading at about 12% above its estimated fair value. The share price is up over 300% in the last five years alone, reflecting excitement and enthusiasm in the tech sector. I feel this is deserved, but as we have seen, shares with high valuations can drop very quickly if the economy takes a negative turn.

To compound this, management have been selling its shares in recent months. This can be totally unrelated to company performance, but I always keep an eye on this trend. If managers taking profits after a healthy rally, then I don’t necessarily want to be buying.

Overall

Apple’s latest announcements at WWDC solidify its position as my favourite in the S&P 500. The eventual embrace of AI, commitment to software excellence, and financial strength make it a company like no other. While challenges and risks are present, the firm’s track record convinces me that it’ll be a sector leader for some time yet. I’ll be adding more shares at the next opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has positions in Apple. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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