In the past 10 years, the Nasdaq Composite has produced a total return of 283%. That's respectable growth, to be fair. However, Apple (AAPL +2.08%) has crushed the broader index, soaring 895% over the same period.
An impressive return like that over a long time period usually happens because the underlying fundamentals are strong. Even the great investor Warren Buffett would agree with Apple's merits as it represents a whopping 46% of Berkshire Hathaway's portfolio.
There are some compelling characteristics that make this tech giant an incredible business. However, investors might regret buying the FAANG stock at present for two very important reasons.
Apple is a great company
In the tech sector, a company can really only find lasting success the way Apple has if it produces superior products and/or services. In this case, the business does both. Game-changing hardware, like the iPhone and Watch, and software (iOS and macOS) and services, including TV+, Music, Pay, and iCloud, make up the ecosystem, and have resulted in strong customer loyalty.
Consequently, Apple has become the strongest brand in the world. By Interbrand's estimates, it's worth $482 billion. Its premium standing helps it generate a gross margin that has averaged 40.7% in the past five years. Pricing power is one of the most attractive qualities about Apple. The new iPhone 15 Pro starts at $999, which is more expensive than a lot of laptops that are on the market.
Apple's iPhones command 21% of the global smartphone market on a unit basis, but account for 82% of the industry's operating profits. That's a clear indication of its premium status, a position management wants to maintain.
These qualitative factors have benefited the company from a financial perspective. Between fiscal 2012 and 2022, revenue and diluted earnings per share (EPS) have increased at compound annual rates of 9.7% and 14.5%, respectively. With that type of bottom-line gain, it's not a surprise that Apple produces enormous amounts of free cash flow, to the tune of $671 billion in the last 10 full fiscal years.
With financial figures like these, it's no wonder the stock has performed so well for investors.
NASDAQ: AAPL
Key Data Points
Future returns could disappoint
There are numerous factors investors can point to that make Apple one of the world's greatest companies. But it might still be a smart idea to avoid buying shares right now. There are two reasons to think this way.
Take the current valuation. After the stock's outstanding rise in the past decade -- including a 31% gain just this year -- the shares definitely aren't cheap. They trade at a trailing price-to-earnings (P/E) ratio of 28.7, which is well above the historical 10-year average of 20.3. This means that prospective investors would have to pay a bloated valuation, a scenario that doesn't bode well for future returns. Paying that high a P/E multiple makes sense for a growth stock, but Apple doesn't fit in this category anymore.
And that brings me to the next reason to avoid the stock. That expensive valuation looks even less intriguing when you consider Apple's growth prospects. This is a business that's at a very mature stage of its lifecycle, even though it is still successfully introducing upgrades to existing products that see strong consumer demand. Double-digit annual revenue gains going forward might be out of the question.
But even if Apple can increase its EPS in the mid- to high teens, the high P/E ratio still adds downside risk if shareholders become disappointed with financial results. For a business that carries a market capitalization of nearly $2.7 trillion, investors need to be realistic about where the potential for market-beating returns could really come from now.
