Thanks to its outsize business success, Apple (AAPL -0.35%) has been a ridiculously fruitful investment. Its shares have soared a jaw-dropping 363% in just the last five years. This leading FAANG stock has handily trounced the market and now sports a market capitalization of over $3 trillion.
Some bullish investors on the sidelines might be looking to buy shares in the new year with the expectation that Apple could double by 2029. This is certainly a lofty projection, but is it a pipe dream? Here's what must happen for this scenario to become a reality.
Accelerating growth
Apple's stellar past returns can mostly be attributed to strong fundamental performance. Looking ahead, there's no doubt the stock will be a winner if the underlying business continues to do well.
Between fiscal 2018 and fiscal 2023 (ended Sept. 30), Apple was able to grow revenue at a compound annual rate of 7.6%, with diluted earnings per share rising at an annualized clip of 15.5%. These impressive gains have helped propel the share price.
Is it likely that Apple will be able to post similar growth going forward? I'm becoming less optimistic. That's because the iPhone, which represents 52% of total revenue, has seen unit volume flatline in recent years. Plus, with new iPhones having fewer updated features, customers could be inclined to hold on to their smartphone devices longer, translating to less frequent upgrades. That's not what Apple's management team likes to see.
Macro headwinds and the law of large numbers might help explain why Apple's fiscal 2023 revenue of $383 billion was down 3% from the previous year. Maybe there just isn't much more room for expansion for a mature, stable, gargantuan enterprise such as this one.
To its credit, Apple has a long, successful history of introducing new hardware products to market. But besides the iPhone, none have really moved the needle from a financial perspective. Should the business introduce a game-changing product, then perhaps growth could accelerate. It's impossible to know whether this will happen.
Astute investors might point to the ascending services segment, which was able to increase sales by 9% in the most recent fiscal year. However, even this division might have limited long-term prospects unless the company can push more of its hardware into the hands of more consumers.
This leads me to believe it's hard to envision a scenario in which Apple continues its past revenue and earnings gains over the next five years. This presents a major headwind to the stock doubling by 2029.
Is the current setup favorable for investors?
But there is one other critical factor that always has a huge impact on investors and their returns. That's the valuation.
As of this writing, Apple's stock trades at a price-to-earnings ratio of about 32. That's expensive, and it's up from a more reasonable 22 at the start of this year. In the trailing-five-year period, the shares have traded at an average P/E multiple of 26, so you can argue that things are pricey right now.
The setup for investors looking to buy Apple in 2024 just isn't very accommodating. At the current valuation, there is above-average optimism priced into the stock. And this doesn't give me confidence that shares will double in the next five years, particularly when you think about the muted growth prospects discussed above.
In fact, I'd say that this outcome of the stock doubling is far more unlikely to happen than it is to occur. I'd even go so far as to say that I wouldn't be surprised if Apple underperforms the S&P 500 between now and 2029. Therefore, it's best for investors seeking market-beating gains to seriously temper their expectations as they relate to Apple.
