Few investors need an introduction to Apple (AAPL 2.48%). The consumer tech juggernaut is one of the most widely recognized brands on Earth, selling products and services that consumers love. It has become a global icon and has rewarded shareholders nicely.
In the past five- and 10-year periods, this "Magnificent Seven" stock has climbed 242% and 802%, respectively, which is a terrific performance. But with a current market cap of $2.6 trillion and a price-to-earnings (P/E) ratio of just over 26, is it too late to buy shares of Apple?
Incredible track record
Apple's hardware lineup includes the iPhone, iPad, MacBook, AirPods, and Watch. These have been so successful that the company claims there are more than 2.2 billion active devices worldwide. The tech titan also offers a wide range of software and subscriptions, like Apple Pay, Apple Music, and Apple TV+, to name a few. Combined, these offerings create a powerful ecosystem that generated $383 billion in revenue in fiscal 2023 (ended Sept. 30).
It's hard to overstate Apple's financial success. The company produces high margins and insane amounts of free cash flow. This allows the management team to pay a small dividend. But the main use of this cash is to repurchase lots of shares.
The great Warren Buffett provided his stamp of approval years ago when Berkshire Hathaway, the conglomerate he runs, first bought the stock. Today, Berkshire owns 5.9% of Apple's outstanding shares.
Tempering expectations
Most people would agree that this is a fantastic business. Apple's track record speaks for itself. However, I do believe that investors looking to buy the stock now are late to the game. I mentioned Apple's market value and P/E multiple earlier. I think these two factors point to the elevated valuation of the business and its shares. Investors should aim to buy and hold great companies, but the last thing they should do is overpay.
I believe Apple doesn't present a good value right now. That's because its growth prospects going forward are limited. Relying primarily on the success of a single product -- the iPhone -- means Apple is in a mature stage of its life cycle. Consumers don't need to upgrade these devices as often as they might have a decade ago. This helps explain why revenue declined in fiscal 2023 before rising by just 2.1% in the latest fiscal quarter (Q1 2024, ended Dec. 30).
Services sales are increasing at a faster clip than products. However, this segment's long-term success is dependent on Apple selling more hardware devices. Without more products out there, the potential for greater revenue from subscriptions is limited.
Investors were excited about Apple's so-called Project Titan, which was the company's closely guarded pursuit of building an autonomous vehicle. It was reported recently that Apple shut down this effort, with many employees being moved to artificial intelligence (AI) initiatives. If the business had been able to follow through with developing and launching a car, it's one product that definitely might have been able to move the financial needle.
Now, Apple is looking to make a push in the home robotics space. It's encouraging to see the company try new things to find its next big product, but it's impossible to predict whether these efforts will bear any fruit. And if they do, I'm not entirely sure they can drive meaningful top-line gains.
Unless there is a clear reason to believe that revenue and earnings growth could pick up going forward, it's best to avoid the stock. That is, of course, unless the valuation drops significantly. But based on the way things are right now, it's too late to buy Apple shares, in my opinion.
