Apple (NASDAQ: AAPL) has been a great stock to own since late September 2019. During that five-year period, the shares delivered a total return of 328%. These gains definitely outpace the broader sector S&P500.
The momentum has continued this year as Apple is up 18% (as of September 27). But investors care about what the future holds. Where will this be? sustainable consumer shares in five years?
Apple’s underlying business
Apple’s business model has changed in recent years. To be more specific, services have become a bigger contributor to financial success. Offers like iCloud, Pay, TV+ and the App Store, among others, are growth drivers, with revenue growing 14% in the latest fiscal quarter (Q3 2024, ending June 29).
In fact, the services are fantastic gross margin of 74%. And they provide a recurring and predictable revenue stream for Apple, which is exactly what shareholders want.
However, this remains a hardware company at its core. Sales of physical products represented 72% of total revenue in the third quarter. These hardware devices are still key to Apple’s success. The iPhone in particular accounted for 46% of Apple’s revenue last quarter.
Although services are becoming increasingly important, I believe that in five years’ time products, especially the iPhone, will still be the most important aspect of the company’s financial performance. Consequently, the company will most likely look very similar to what it looks like today.
But artificial intelligence (AI) will play a more prominent role. Apple just released its 16th series of iPhones. And these newer devices will be too Compatible with Apple Intelligencethe company’s new AI-powered software that allows users to summarize text, improve their writing skills and edit photos. The hope is that AI can drive greater demand for new iPhone sales, but so far this has not been the case.
Not the best setup for investors
Apple could have been a hugely successful investment over the past five years. But I don’t believe this will be the case in the next five years.
Part of the reason I think this way has to do with valuation. If you want to buy Apple stock, you pay a price-earnings ratio (P/E) ratio of 34.7. On the one hand, it’s easy to argue that such a dominant company deserves a high multiple. After all, Apple owns one of the strongest brands in the world, is incredibly profitable, and is even a top holding company led by Warren Buffett. Berkshire Hathaway.
However, that price-to-earnings ratio is 22% higher than the stock’s five-year average. Expectations have outgrown the underlying fundamentals. Paying a higher valuation would only make sense if investors believed that Apple would achieve outsized growth in the coming years. However, it is difficult to be optimistic in this regard.
Compared to five or ten years ago, Apple is now a very mature company. There are more than 2.2 billion active devices spread across the world. While this figure is rising an inch every quarter, there are simply fewer opportunities to get your hands on these products, especially the iPhone. Revenue is expected to increase by only 5.8% per year between the 2023 and 2026 financial years.
And while the iPhone may be the most successful product of all time, newer updates aren’t as revolutionary as they once were. This does not encourage consumers to switch to the latest model, which can put pressure on sales growth. When it comes to AI, the jury is still out on whether or not people want or need these new features. It could all turn out to be hype.
There’s a very good chance the stock will underperform the broader S&P 500 over the next five years. And that’s why I don’t own any shares.
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Where will Apple stock be in five years? was originally published by The Motley Fool
