Apple (AAPL +0.73%) shareholders have had a great 2023. The stock has gained 50% through early December and is sitting near its all-time highs as the year draws to a close.
Investors have good reasons to be excited about the tech giant's growth prospects over the next several years. But much of that optimism is already reflected in Apple's valuation, which is sitting at $3 trillion today.
That massive market capitalization does make it less likely that investors will see a repeat of 2023's returns in the coming year. But the stock might still be a good buy for patient investors. Here's why.
Apple is adding services revenue
Apple is indeed seeing weaker growth in some of its major product categories following huge gains during the pandemic. Its Mac and iPad sales are down over the past year, and the iPhone business only recently returned to expansion in the fiscal Q4 period that ran through late September.
NASDAQ: AAPL
Key Data Points
Yet Apple entered the holiday shopping season with a strong lineup of smartphones, watches, and computing products. That impressive portfolio is a big reason why most Wall Street pros predict modest sales growth this year, along with a larger 6% increase in fiscal 2025.
But the fastest-growing part of Apple's business is its services division, which includes platforms like its app store and music and TV streaming subscriptions. Gains here are helping make revenue trends more predictable even as they boost profit and cash flow. Those factors are likely to support more market-beating returns from the stock over time.
Apple is tapping into loyalty to maintain profits
While sales trends slowed a bit, Apple hasn't lost any ground on the critical customer satisfaction metric that powers long-term growth. Over 90% of iPhone users remain in that brand when they choose to upgrade their devices, for example. This loyalty also shows up in the fact that Apple's base of installed devices continues to set records and sits at over 2 billion today.
And the company has no trouble capitalizing on the value it provides for all these customers. Operating profit margin declined only slightly over the last year despite higher spending in areas like research and development. Apple generated $114 billion of operating earnings in the past year, landing its margin at nearly 20% of sales.
Cash returns suggest a positive outlook for Apple
Owning Apple stock in 2024 will almost certainly mean more cash is headed your way. Thanks to its highly efficient global business, industry-leading profit margins, and the ongoing tilt toward services sales, Apple generates well over $100 billion a year in operating cash flow. Management is determined to send much of those resources to shareholders through stock buybacks and dividend payments. Spending in these areas was $25 billion just in the last quarter alone.
In that context, Apple's stock doesn't look too expensive heading into 2024. Shares are priced at 8 times annual revenue and 32 times earnings. Microsoft's comparable valuation metrics are 13 and 36, respectively.
Sure, Apple isn't as profitable as the software specialist. And sales trends haven't been as robust in the past year. But 2024 will likely bring faster growth and rising profitability, even as Apple showers investors with cash. That's a formula for market-beating returns over time.
