Is Apple a Buy, Sell, or Hold in 2025?

Investors have a lot to celebrate this year, with the S&P 500 gaining 20%. While it's nice to receive high returns, it's also a good time to examine your holdings heading into the new year.

Apple's (NASDAQ: AAPL) stock has underperformed the market by 2 percentage points since the start of the year, increasing 18.3%. However, the company has had a lot of success in the past and richly rewarded shareholders. After all, the company has a $3.5 trillion market capitalization, one of the few that have crossed the trillion-dollar threshold.

Can Apple's shares regain their market-beating ways? The answer lies in examining the company's long-term prospects and valuation.

Image source: Getty Images.

Can a new phone revitalize sales growth?

Apple's iPhone accounts for a large portion of the company's sales. During the first nine months of the fiscal year, which ended on June 29, the product represented 52% of Apple's $296.1 billion top line.

Facing intensifying competition, including from China-based Huawei, iPhone sales have been dropping, In the most recent quarter, they were down 1% to $39.3 billion.

More troubling is that the product has also been losing market share. Apple's iPhones accounted for 15.8% of smartphone shipments in the second quarter, down from 17.3% 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. Whether that will cause existing customers to upgrade to the expensive models or cause users to switch to an iPhone remains unclear, however. It's too early to make a judgment on how the new features will impact the top line. Although initial sales reportedly have been disappointing, investors should have more information when Apple reports quarterly earnings in about a month.

Can services sustain growth?

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

In the latest quarter, service sales grew 14.1% to $24.2 billion. And this category has a much higher gross margin than products, 74% versus 35.3%.

However, the U.S. government and several states have claimed Apple's iPhone has an illegal monopoly that makes it too difficult for consumers to switch phones and develop apps. This could result in a drawn-out process, and the outcome remains uncertain. The cases have the potential to hurt Apple's service business' profitability.

Meanwhile, after a dearth of brand-new product categories, Vision Pro, its widely publicized 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 initial 800,000 estimate.

The decision

The shares' gain over the last year has led to a richer valuation. Apple's stock has a price-to-earnings (P/E) ratio of 34 compared to about 28 a year ago.

The stock also sells at a higher multiple than the S&P 500's P/E of 30 , making it more expensive than the overall market. The S&P 500 makes a good comparison since it's comprised 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 slumping, and it's unclear if its new phone version can stem this slide. The new AI feature doesn't seem likely to provide a long-term competitive edge since others seem likely to quickly incorporate something similar.

Along with a government investigation and unclear prospects for its newest product, I'd steer clear and sell any Apple shares you may hold.

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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.