Shareholders hope the good times can continue, but that might not be the case.
As of this writing, Apple (AAPL -0.12%) is the world's most valuable enterprise, with a massive market cap of $3.5 trillion. It has become a global technology and cultural icon.
That huge valuation is thanks to impressive returns. Since July 2019, shares have soared 357% (as of July 9, 2024), easily outpacing the 137% total return of the Nasdaq Composite Index.
This top "Magnificent Seven" stock has clearly been a huge winner in the past. But where will Apple be in five years?
Hardware rules
Apple is well-known for selling popular hardware products. In fact, these still drive the company's financial performance. In fiscal 2023, 78% of Apple's revenue came from devices, with the vast majority resulting from the iPhone. The company's other product include MacBooks, iPads, AirPods, and the Apple Watch.
Most investors would agree that Apple will still be generating most of its sales from hardware products five years from now, particularly from the iPhone. Even though this device is 17 years old, with the first launch occurring in June 2007, the business continues to introduce newer models. The problem, though, is that people likely don't feel the need to upgrade as often as they did before, as innovations become less and less game-changing.
Revenue totaled $383.3 billion last fiscal year, which was down 2.8% compared to fiscal 2022. Apple is already such a massive company that it's becoming increasingly difficult to drive meaningful growth. Unless a revolutionary new product is introduced, I don't see this changing.
Creating the ecosystem
Besides hardware, Apple also sells software and services, which registered $85.2 billion of revenue in fiscal 2023, or 22% of the total. Offerings include cloud services, digital ads, Apple Pay, Apple Card, Apple Music, Apple TV+, and the App Store.
The advantage this segment has is that in second-quarter 2024 (ended March 30), it carried an outstanding gross margin of 75%, significantly above the hardware division's gross margin of 37%. Even better, services have typically reported faster top-line growth as well.
It's one thing to sell hardware products, which on their own might not result in a special business. But what makes Apple unique is that it successfully combines hardware and software, and this creates an ecosystem that essentially locks users in. This helps explain Apple's strong brand and customer loyalty.
In order to bolster this already powerful ecosystem, Apple is aiming to make a bigger splash in artificial intelligence (AI). Management announced features like enhanced writing tools, an improved Siri, and ChatGPT integration, among others, that will come equipped in the newest iPhone model, set to be released later this year. The hope is the addition of AI will drive greater iPhone sales, as people find that having access to these features is essential to their daily lives. Time will tell if this all works out, though.
Is it too late to buy Apple stock?
Apple shares have done remarkably well historically. And just in the past month or so, after the company's AI strategy was revealed, shares soared 18%, as the market seems bullish on Apple's prospects. The stock currently sits in record territory.
In my opinion, it might now be too late to add Apple to your portfolio. The price-to-earnings ratio of 35.5 represents a huge premium to the trailing five- and 10-year averages. You would think Apple was about to experience an above-normal growth spurt in the years ahead to justify this valuation.
But this just doesn't seem likely. According to Wall Street consensus analyst estimates, the business is expected to increase revenue and earnings per share at compound annual rates of 5% and 10%, respectively, between fiscal 2023 and fiscal 2026. I'd expect these trends to continue even further out than that, which makes me think that Apple shares will underperform the broader Nasdaq Composite Index over the next five years.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
