As one of the best businesses in the world, Apple (AAPL 0.50%) has unsurprisingly been one of the best investments. In the last three years, the stock has climbed by 46%, more than doubling the 22% gain of the Nasdaq Composite index.
Even this year, Apple has trounced the overall market. And its market cap is still below the $3 trillion mark.
But what investors really care about is what the future might look like. Apple shares currently trade at approximately $178. Where will they be in three years? Here are some major potential trends to be mindful of as it relates to this dominant tech enterprise.
Apple's decelerating growth
In the trailing 12 months, Apple generated revenue of $384 billion. That's a ridiculous figure to wrap one's head around. Naturally, a company this large will see its growth slow as opportunities to meaningfully expand start to become limited. In fact, in each of the last three quarters, Apple's sales fell on a year-over-year basis. However, between fiscal 2017 and fiscal 2022 (which ended in September of last year), the business increased its revenues at an annualized clip of 11.5%, so perhaps the recent troubles are due more to macroeconomic factors than to anything specific about the company.
That's an optimistic perspective, to be sure. But investors need to temper their expectations. Wall Street analysts tend to agree that the Apple of the future will see smaller gains, as the company is forecast to increase revenue at a compound annual rate of 3.4% between fiscal 2022 and fiscal 2025.
Adopting a conservative view is rational. Apple is already everywhere, it seems, with more than 2 billion active devices. More growth could come from India, the most populated nation on Earth, where Apple just opened its first store, but the U.S. market is still key to the company's success. Unless it debuts another game-changing product that has truly massive market potential, its growth will surely decelerate.
Returning cash to shareholders
Though Apple has reached a more mature stage of its lifecycle, one thing is certain: This business prints money. In its fiscal 2022, Apple produced $111 billion of free cash flow. And in the first three quarters of its fiscal 2023, it produced $80 billion.
If top-line growth won't be enough to excite investors, Apple's ability to return huge amounts of cash to shareholders is still an attractive quality. Through the first three quarters of fiscal 2023, the business paid $11.3 billion in dividends and bought back $56.5 billion worth of stock.
Berkshire Hathaway, the conglomerate run by Warren Buffett, owns about a 6% stake in the iPhone maker. This translates to sizable passive income for the Oracle of Omaha's firm, likely a key reason he's holding onto the stock. Moreover, as Apple continues shrinking its outstanding share count, Berkshire's equity ownership, as well as every other shareholder's, will climb.
Valuation compression
Thanks to Apple's tremendous outperformance in recent years, and especially in 2023, the stock isn't cheap. It trades at a trailing price-to-earnings (P/E) ratio of 29.8. In the past decade, its shares have, on average, sold at a P/E multiple of 20.2, so they are certainly more expensive than usual now.
It's hard to pinpoint why Apple's valuation has risen so much. Maybe investors view the business as a bit of a safe haven in a world that's seemingly always full of uncertainty. I'm not sure.
But I think there's a good chance that Apple's P/E ratio three years from now will be lower than it is today. The valuation could revert back toward the mean. And as the market realizes that Apple's growth prospects are diminishing, the stock could get rerated downward.
It's difficult to bet against Apple, but valuation definitely matters. And if we look out over the next three years, a strong case can be made that the stock won't outperform, and might actually underperform the broader market.
