Apple (AAPL 0.50%) has been one of the top-performing stocks over the past 20 years, as it's transformed from being a small PC maker to the iconic smartphone leader. But the position the company is in today is very different from what it was even a decade ago.
iPhone sales growth has slowed, and product refresh times have lengthened for the iconic product. Apple's growth is now mainly in services and accessories that augment the iPhone. Despite the slowing growth, Apple stock has risen and is now trading at about 30 times trailing earnings. Is that too expensive for such a big company?
Beyond the iPhone's glory days
The iPhone proliferated in the market faster than almost any tech product before it and, while its sales these days are massive and generally considered successful, its year-over-year growth has slowed as the market became saturated.
In the last seven years, iPhone sales volume has leveled off at around 210 million to 230 million units per year, and the segment's revenue is only up 41% over that stretch of time. Revenue is up largely because the price of the iPhone has increased with each new iteration. This isn't necessarily bad for Apple, but it shows that this is a cash flow product, not a growth product, in 2023.
The growth engine for Apple
Today, Apple's overall growth is driven more by services and accessories like AirPods. Services revenue grew at a 19.8% compound rate over the last seven years, and accessories grew at a 19.1% rate over that time.
It's logical to try to monetize the success of the iPhone with digital products like services, including Alphabet's multibillion-dollar annual payment to be the default search engine. But there are questions now arising about how much more this business can grow.
It also doesn't help that government regulators are looking at how much control Apple has over the App Store and the 30% fee it charges developers. Some developers have also gotten around the App Store by having customers go directly to the website.
On the accessories side, AirPods were a smash hit for Apple, but that success has been difficult to repeat. The soon-to-be-released Apple Vision Pro has the potential to be a compelling virtual reality headset, but is there a demand for VR on a scale that will actually make an impact on Apple's financials? The Apple Watch would be a hit for most companies, but it doesn't have a huge impact on Apple's financials. The same goes for HomePods, which Apple thought could be a central hub for controlling the home.
Growth opportunities at Apple just aren't as easy to come by at the company's immense scale as they once were, and that's why the valuation is so difficult to assess.
Apple's valuation challenge
A decade ago, Apple was a growth stock with a low valuation, at a 12 price-to-earnings multiple. But today, growth has slowed and multiples have expanded. Shares are currently trading for 30 times trailing earnings.
AAPL PE Ratio data by YCharts
That's an expensive multiple for a company growing in excess of 20%, but if Apple's growth is going to be in the single digits, it could be a prohibitive price to pay.
I think Apple is holding up well in the market because of its stalwart status, which commands a premium from investors, but that doesn't mean this is going to be another performance star over the next decade. That's why I think this can be a core holding in any portfolio, but it's a stock I would hold or sell, not buy, today.
