You probably already know Apple (AAPL 0.06%) is the world's biggest company (as measured by market capitalization) as well as one of the planet's most profitable corporations. And for good reason. This is the company behind the world's single most popular smartphone, after all, and it garners fierce loyalty from users thanks to the world's most popular ecosystem of apps and other digital content.
As veteran investors can attest, though, you shouldn't buy stocks based on where their underlying companies were, or even are. You own them for where they're going.
This raises two important questions about Apple and its stock: Where will the company be five years from now, and what might that mean for Apple shares?
Spoiler alert: Current Apple investors will like the outlook but probably won't love it.
Slowing down where it hurts the most
Come 2028, Apple will still be a technology powerhouse. The company's highest-growth days, however, are largely in the past.
Nowhere is this more clearly represented than with a visualization of the company's historical iPhone revenue and iPhone deliveries. Even before the COVID-19 pandemic took hold in 2020, iPhone sales were stagnant, even teetering on the verge of measurable decline. The pandemic itself actually helped spur a wave of iPhone purchases, but that swell wasn't meant to last. Both iPhone revenue as well as deliveries are easing back to pre-pandemic levels, sinking more than they're growing.
iPhone revenue data source: Apple Inc. iPhone unit deliveries data source: IDC. Chart by author. Revenue data is in billions. Unit-delivery data is in millions.
It matters simply because the iPhone still accounts for around half of Apple's revenue. Just for the record, demand for Apple's other products has also been lackluster since peaking in the middle of last year.
Data source: Apple Inc. Chart by author. Figures are in billions.
Some of this slowdown could be attributed to economic malaise and inflation. Much of it, however, may simply reflect market saturation. The company has confirmed there are now more than 2 billion Apple-made devices (mostly iPhones) currently in use. That's obviously not the whole world, but it is a sizable chunk of the total addressable market.
People are holding onto their existing Apple-made devices for longer periods of time, crimping demand for upgrade purchases. Analysts with brokerage Morgan Stanley estimate the average iPhone is now a record-breaking 4.4 years old.
Here's the good news: Morgan Stanley also believes the likely debut of the iPhone 16 next year will unleash a wave of upgrade buying that's been put on hold for a while now. Even so, such upgrade cycles haven't exactly been game-changers for Apple. The bigger-picture, longer-term revenue trend is still mostly moving sideways rather than moving higher.
Services to the rescue ... somewhat
All is not lost. While product-revenue growth is flattening out, Apple's services revenue (sales of apps and digital content) continues to grow.
Perhaps recognizing there are only so many iPhones that can be sold in any given year -- just as there are only so many people who will ever want to own one -- the company began taking its app store more seriously back in 2017. And in retrospect, it was a brilliant move. While its services arm is Apple's distant second-biggest business in terms of revenue, it's still an incredibly profitable one. Around 70% of its services revenue is turned into gross profit, and services alone make up roughly one-third of Apple's gross profits.
Data source: Apple Inc. Chart by author. Revenue and gross profit figures are in billions.
The graphic above tells us something else about Apple's digital content business too. That is, despite last year's lull, this arm is still growing, reaching a record-breaking $22.3 billion worth of revenue during the three months ending in September.
We don't know where Apple's services business-revenue ceiling is. What we do know is the annualized revenue figure of $100 billion is being tossed around rather regularly now. That's roughly $15 billion more than its current annualized revenue run rate and makes sense as a target.
Beyond that milestone, however, the growth picture for Apple's services arm turns murky.
In the same sense that there's an absolute limit to the number of iPhone users and the number of iPhones that can be sold in any given year, there's also a limit to how many apps and how much digital content even the heaviest users of Apple's products will be willing to pay for. The planet's 2 billion-plus iOS users are currently spending an average of around $44 per year on services that make more use of their Apple-made devices. It's tough to see them spending a great deal more on this front than they already do.
Connecting the dots
So what does it all mean looking forward?
Again, nobody's got a crystal ball. What's known is where Apple stands right now, and analysts have a good feel for the trends behind the company's two biggest businesses -- the iPhone and services.
It's conceivable Apple's iPhone arm isn't going to be any bigger in five years than it is right now. It's also likely that Apple's services arm will become a $100-billion-a-year business by 2028, but it's difficult to see it getting much bigger than that. Sales of Apple's other products, like iPads and Macs, may grow a little during this time frame, although even that's a tough expectation to get behind given their lackluster results of late.
To the extent a number helps paint the picture, Apple's top line could easily be less than $500 billion in 2028. That's 30% more than the recently ended fiscal year's revenue, but it's a growth rate that's also very un-Apple-like.
The analyst community is slightly more bullish (although only slightly), calling for 2028 sales of around $550 billion. Even then, it's still not exactly a thrilling growth outlook. Earnings-growth projections don't exactly help the bullish argument much either.
Data source: StockAnalysis.com. Chart by author. Revenue figures are in billions.
As for the stock, here's where current and prospective Apple investors will likely catch a break; this ticker tends to move in step with the company's growth no matter how fast or slow that growth is. Presuming the sales and earnings-based pricing paradigm remains in place, the stock's current price near $200 could be closer to $300 five years from now.
The one potential game-changer is if Apple comes up with a new and completely unexpected must-have product that could shake up these expectations for the better. There's no such product even on the radar, though. So don't get your hopes up in that regard.
