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Apple (NASDAQ: AAPL) is one of the most iconic companies in the world. It's also one of the largest, with a market cap of $5 trillion. Its stock has also been a huge winner over the past decade, up more than 1,070% during that stretch. With just under $10,000, you could buy 29 shares of the stock.
The company is best known for its popular iPhone, which makes up roughly half its total sales and around 70% of its product sales. Meanwhile, Macs (computers), iPads (tablets), and wearables (smartwatches, headphones, and other accessories) each make up around 10% of its product revenue.
Missed AI's "Act 1"? Act 2 Could Be 14x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we're only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »
These products tend to have fairly predictable replacement cycles, which leads to relatively stable sales. Meanwhile, the company's newer, higher-priced foldable iPhone and recent price increases should be a nice revenue growth driver.
While Apple only holds around 20% of the global smartphone market, it importantly has a strong position among affluent customers. The iPhone has well over 50% share of the U.S. smartphone market and is often seen as more of a luxury item in international markets. This is important because it feeds directly into the company's important services segment.
The great thing about Apple's business is that once someone buys one of its devices, they tend to get locked into the company's ecosystem. The company has built a high-end reputation, and its devices work together seamlessly. Meanwhile, switching becomes more difficult the more apps and subscriptions you buy and photos you take.
This all leads to high retention, which in turn feeds into Apple's high-gross-margin services business. The company makes money here through things like cloud storage and the sales of apps and subscriptions on its devices. It also gets a 36% share of the revenue from Google searches on its devices through an agreement with Alphabet. Finally, it generates revenue by taking a small cut from Apple Pay transactions.
Overall, Apple's services segment consistently grows its revenue in the low to mid-teens and has a mid-70% gross margin, significantly higher than its product segment's gross margin of roughly 40%. This leads to its profit growth nicely outpacing its revenue growth.
Apple has one of the best compounding businesses on the planet, which benefits long-term investors. However, the one thing working against the stock at the moment is its valuation. Before the pandemic, Apple stock generally traded at a price-to-earnings (P/E) ratio between 15 and 20, while today its P/E is closer to 40, and its forward P/E is roughly 35.5, based on fiscal 2027 (ending September) analyst estimates.
Analysts currently forecast that the company's adjusted earnings per share (EPS) will rise from $8.83 this fiscal year (ending September 2026) to $15.12 in fiscal 2030. Add another 10% EPS growth the following year, and it would generate adjusted EPS of $16.63 in fiscal 2031.
Now the question becomes what type of multiple Apple should command. It's a great business, but the stock appears to be ahead of itself following years of multiple expansion. Assign the stock between a 20 times and 30 times forward P/E, and it would trade between $330 and $500. That represents between a 3% decline in the stock and a 47% gain. At the midpoint, the stock could see a 22% gain, and a just-under-$10,000 investment would be worth between $9,570 and $14,500.
Given Apple's multiple expansion over the past several years, it's pretty likely the stock will underperform the market over the next five years. Either it has to sustain its bloated multiple, which is certainly possible, or it needs to greatly outperform expectations, which may not be easy given the size of its business.
As such, this is a growth stock that I'd pass on buying at the moment.
Most investors think they missed the AI boat because they didn't buy Nvidia in 2005.
But according to our analysts, we're only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout, a massive technology build-out that Google's CEO says could be more profound than fire or electricity.
While everyone watches the chip designers, one "backbone" company provides the critical technology that Nvidia and AMD literally cannot function without. We've detailed this under-the-radar player in our new AI Playbook.
Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool has a disclosure policy.
Here's What a $10,000 Investment in Apple Stock Could Be Worth in 5 Years was originally published by The Motley Fool
