In the realm of consumer discretionary stocks, one giant has stood tall: Apple. Since late 2019, its shares have yielded a staggering 328% total return, leaving the broader S&P 500 in its dust. This year alone, the tech behemoth has seen its stock rise 18%. But investors are always looking to the future, wondering what the next five years hold for this Silicon Valley stalwart.
Apple’s business model has undergone a significant transformation in recent years, with services emerging as a major driver of growth. The likes of iCloud, Apple Pay, TV+, and the App Store have become a powerful engine, posting a 14% sales increase in the latest fiscal quarter. These services boast an impressive 74% gross margin and provide a predictable revenue stream, music to shareholders’ ears.
However, at its core, Apple remains a hardware company, with physical products accounting for 72% of overall revenue in Q3. The iPhone, in particular, continues to be a cash cow, representing 46% of Apple’s sales last quarter. While services are gaining importance, it’s likely that products, especially the iPhone, will remain the mainstay of Apple’s financial performance five years down the line.
One area that could potentially shake things up is artificial intelligence (AI). Apple’s latest iPhone lineup is compatible with Apple Intelligence, an AI-powered software that can assist users in various ways. The hope is that AI will drive demand for new iPhone sales, but so far, that hasn’t been the case.
Despite its past successes, Apple’s valuation is a cause for concern. With a price-to-earnings ratio of 34.7, investors are paying a premium for a dominant business. While Apple’s brand strength, profitability, and Warren Buffett’s seal of approval justify a high multiple, the current valuation outstrips the stock’s trailing five-year average by 22%. Expectations have outpaced fundamentals, making it difficult to be optimistic about future growth.
As a mature enterprise with over 2.2 billion active devices worldwide, Apple faces fewer opportunities to expand its user base, especially for the iPhone. Revenue growth is projected to slow to 5.8% annually between fiscal 2023 and 2026, and newer iPhone updates are no longer revolutionary enough to drive sales. The jury is still out on whether AI features will resonate with consumers, making it uncertain whether Apple can sustain its momentum.
Given these factors, it’s possible that Apple’s stock may underperform the broader S&P 500 over the next five years. As a result, some investors may choose to explore other opportunities.
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