The headwinds facing Apple (AAPL 0.48%) today are well known. Sales of the iPhone, iPad, and Mac are all declining. The Apple Watch, a market leader in smartwatches, hasn't become a meaningful source of revenue yet. The company's software services are growing, but they still can't offset the importance of the iPhone, which generated over half its sales last quarter.
Most importantly, Apple has arguably become a follower instead of an innovator. The Apple Watch wasn't a big leap over other smartwatches, the iPad Pro resembles Microsoft's Surface Pro, and the dual cameras on the iPhone 7 resemble the Leica-designed dual cameras on Huawei's P9.
Apple stock looks cheap today at 12 times earnings, but where will it head over the next decade? Let's discuss Apple's upcoming products, the headwinds it faces, and the stock's valuations to find out.
What's next for Apple?
Apple is currently trying to grow its services revenue -- from Apple Pay, Apple Music, Apple Care, iTunes, licensing, and other services -- to reduce its dependence on hardware. Last quarter, its services revenue rose 19% annually to $5.98 billion, or 14% of its top line. That represents solid progress from 12% of revenue in the previous quarter and 9% of revenue in the prior year quarter.
As for hardware, Apple hopes that it can sell more iOS devices to enterprise customers to offset its stagnant growth among mainstream consumers. Enterprise partnerships with IBM, Cisco, and other tech giants are helping it gain more traction in cloud-based work and collaboration apps.
Apple is also reportedly developing augmented reality (AR) apps and virtual reality (VR) headsets, which could give it new hardware to challenge Facebook's Oculus Rift or Microsoft's Hololens. Its long-rumored "Project Titan" could launch a self-driving electric car by 2021. Its recent $1 billion investment in Chinese ride-hailing app Didi Chuxing, which subsequently acquired Uber China, highlights its growing interest in the connections between mobile devices and connected cars.
These are all high-growth markets. Tech M&A advisory firm Digi-Capital estimates that the AR and VR markets will respectively grow to $90 billion and $30 billion valuations by 2020 -- compared to practically nothing in 2015. Boston Consulting Group believes that the driverless car market could also grow from nothing today to $42 billion by 2025.
These efforts will also be expensive. Apple will likely spend $10 billion on R&D this year, up 30% from 2015 and more than triple what it spent four years ago. But with $18 billion in domestic cash and equivalents and $215 billion overseas, it has plenty of room to pursue new investments and acquisitions.
The headwinds it faces
However, Apple also faces massive headwinds as it diversifies away from hardware. Alphabet's dominance of search and mobile operating systems, Facebook's dominance of social networking, Amazon's strength in cloud platforms and e-commerce, and Microsoft's resilience in the enterprise market could make it tough for Apple's software platforms to gain ground.
Major battle lines are already being drawn in connected cars, smart homes, virtual reality, payment systems, cloud storage systems, location-based services, and streaming media. These battles will intensify as Apple expands its ecosystem. Apple will also likely need to build its own data centers to declare cloud independence from Google, Amazon, Microsoft, and others so it doesn't continue funding its top rivals.
Moreover, Apple must figure out what to do with its overseas cash. If it doesn't repatriate that cash to the U.S. soon, it risks funding buybacks with debt in a higher interest rate environment. If it repatriates, it will be hit by a massive tax bill of at least 35%. Meanwhile, regional governments like those of the EU, which recently demanded that Apple pay nearly $15 billion in taxes to Ireland, could make it much tougher to stash its cash overseas.
So where will Apple be in 10 years?
Over the next five years, analysts expect Apple's earnings to grow at an average rate of 7.85% per year. This means that by the fifth year (2021), Apple could post earnings of about $12 per share. Apple's P/E ratio has bounced between 10 to 18 over the past five years. Based on a midpoint P/E of 14, Apple stock could be worth almost $170 by the end of 2021.
Assuming that Apple continues to deliver 8% growth over the following five years, it could post earnings of about $18 per share by 2026. Based on a P/E ratio of 14, a reasonable price for Apple by then would be about $250.
However, long-term analyst forecasts, especially for tech companies, can be extremely inaccurate due to disruptive developments. Sales could accelerate once new software and hardware products arrive, but they could also plunge if those efforts flop. Therefore, it's impossible to know exactly where Apple stock will be in ten years -- but investors should still keep a close eye on these growth opportunities.