Apple: Highly Rated and on a Growth Path, but Worthwhile for Investors?

Apple achieved a revenue of $386 billion last year and remains the most valuable company in the world with a market capitalization of nearly $3.5 trillion. However, the question arises whether it is still sensible to invest in the stock now. Two reasons argue against it. Firstly, Apple remains a dominant technology company. With more than 2.2 billion active devices worldwide, the reach of its products is immense. However, this broad usage also indicates that future growth will not be possible to the same extent as in the past. Apple is a more mature company today than it was five, ten, or fifteen years ago. This is also evident in the 2.8% revenue decline in fiscal year 2023 compared to the prior year. In particular, the iPhone offers increasingly fewer groundbreaking innovations that would justify an annual upgrade. There is hope that the Apple Intelligence initiative, i.e., the integration of Artificial Intelligence, could trigger a new wave of product enhancements. Nevertheless, skepticism remains as to whether these technological features can boost demand significantly enough for Apple to experience substantial growth. Most consumers are unlikely to consider AI essential to their daily lives. The services segment, with offerings such as Apple Pay, Music, and TV+, which achieved a 14% growth in the last quarter compared to the previous year and an impressive gross margin of 74%, should be highlighted positively. This combination of hardware and software creates a powerful ecosystem that significantly enhances Apple’s competitive advantage. Nevertheless, growth remains modest in the context of its own history. Analysts project an average annual growth rate of 5.9% in revenue and 10.9% in earnings per share (EPS) for Apple between fiscal years 2023 and 2026. This growth rate is significantly slower compared to the last three years. Another reason why Apple’s stock may appear less attractive at the moment is its valuation. The current price-to-earnings ratio (P/E) is 34.4, which represents a 22% premium compared to the average of the last five years. Compared to the broader S&P 500, Apple is even 43% more expensive. One could argue that Apple deserves this high premium due to its strong brand, pricing power, and high cash profits. Nonetheless, investors are likely to see weak returns at such a high valuation level. If the P/E were to return to the average of the last five years of 28.2 in the next five years and the EPS growth of 10.9% per year were to persist, an annualized return of only 7% until 2029 would be expected. This would fall short of the historical annual average return of the S&P 500 of 10%. Apple has been an outstanding investment in the past. However, the current timing for a purchase appears less favorable. This assessment could change with a significant price drop.