Everyone knows Apple (AAPL -0.65%) for its iconic brand. But investors know Apple as a long-term outperforming stock and the largest U.S.-based company by market cap.

Apple uses a lot of its excess cash to buy back its own stock. But the value of these buybacks is often underappreciated, especially during a period of slowing growth like Apple is in right now.

Let's take a look at what's impacting the tech company today and why the stock could be worth buying even if growth remains muted over the next five years.

A person working on a laptop computer on a table with plants in the background.

Image source: Getty Images.

Apple's services remain a powerful aspect of the business

Apple is possibly the single-most powerful consumer-facing brands in the world. Its most exciting area of growth isn't products but services.

For the nine months ended July 1, 2023, services made up 21.4% of total revenue but 34.6% of gross profit. The services segment notched a 70.9% gross margin during the period, which illustrates the value it brings to Apple's bottom line.

Most importantly, services boost customer interaction with Apple's ecosystem. Apple Pay, Apple Music, and Apple TV+ are just some of the many services that improve the iPhone experience. These services build value even if the improvements to the products are incremental. It's also a way for Apple to generate recurring revenue instead of relying on customers to upgrade their devices.

What the numbers say

Services have been a big growth driver for the business. But even then, services revenue is down year over year in the nine months ended July 1. The same goes for the products segment. 

Apple's trailing-12-month revenue and net income remains virtually unchanged over the last two years after a massive boost in 2020 and 2021.

AAPL Revenue (TTM) Chart

Data by YCharts.

There's no denying that the pandemic pulled forward future sales. This isn't necessarily a bad thing, it's just tougher to post growth compared to difficult comps.

If you zoom out, Apple is still a massively successful business, booking nearly $100 billion in net income per year.

The glass-half-full way of looking at Apple is that its top and bottom lines have only slightly declined. Many businesses that enjoyed a surge in sales during the pandemic suffered steep drop-offs over the last couple of years. That's not the case with Apple, which is facing merely a couple of percentage points of top and bottom-line declines.

At its current level, Apple is still able to pay a dividend, invest in long-term growth, and buy back a ton of its own stock, which permanently boosts shareholder value by reducing the outstanding share count and making earnings per share (EPS) artificially higher.

When most companies are facing a difficult short-term outlook, they pull back on buybacks and need to preserve cash. Apple is navigating the diminished spending on discretionary goods with ease. It may not be the growth that Wall Street has come to expect, but as a business, Apple's doing just fine.

The power of buybacks

Buying Apple stock at its current valuation of 29.5 times trailing earnings is an aggressive bet if you only focused on how the business is doing now. But zoom out, and it's completely reasonable.

Over the last five years, Apple spent a staggering $386.9 billion buying back its own stock, or an average of $77.4 billion per year. Over the last 10 years, Apple has reduced its share count by 37.9%.

AAPL Stock Buyback (Annual) Chart

Data by YCharts.

All signs point toward Apple sustaining its rapid buyback pace or even accelerating it.

If you take a conservative estimate and assume the same amount of buybacks for the next five years -- and factor in Apple's current market cap of $2.74 trillion -- Apple should be able to boost EPS by at least 14% over the next five years on buybacks alone. This alleviates pressure on Apple's organic growth.

Even if the business is only growing earnings at, let's say, an average of 8% a year over the next five years, Apple's earnings would still be 47% higher in five years. And if you factor in 14% fewer shares outstanding, you're looking at EPS growth of approximately 70% in five years. 

The lesson here is that stock buybacks can pick up a lot of the slack from a low growth rate. Now, let's take this scenario even further.

If you agree that Apple can grow earnings 8% annually and buy back the same amount of stock over the next five years, but you think the stock only deserves the market average P/E ratio of 23 instead of the nearly 30 P/E ratio the stock boasts today, then Apple stock would be worth a little over $230 per share in five years. 

Compared to the $174 per share price as of this writing, that's a 33% return over a five-year time period, which is decent but not great. But given how conservative these assumptions are, and the market-neutral valuation this assumption gives to Apple, it reaffirms the notion the stock isn't all that overvalued.

A balanced buy

If you're wondering why Apple stock has suffered such short-lived sell-offs over the last few years, there are really two reasons. The first is that it is one of the best companies in the world. And the second is that its relentless buybacks act as a lead weight that pulls down on its valuation and prevents it from getting too expensive.

Apple is one of those rare businesses that is well run from an operational perspective but is also steadfast in rewarding its shareholders. The stock isn't cheap, but selling Apple and losing sight of the ace in the hole its balance sheet provides could be a big mistake for long-term investors.