Seventeen years have elapsed since Apple (AAPL 0.39%) announced the first iPhone on Jan. 9, 2007, a breakthrough product that gave rise to the smartphone industry. The stock has been a phenomenal investment since that momentous event. Specifically, it returned a total of 7,390% over the last 17 years, compounding at 28.7% annually. That means an initial investment of $15,000 in January 2007 would now be worth $1.1 million.
Is Apple still a smart investment today?
NASDAQ: AAPL
Key Data Points
Apple has been a consistent innovator throughout its history
Steve Jobs and Steve Wozniak founded Apple in 1976 and the Apple I computer debuted that same year. But it was the Apple II in 1977 that positioned the start-up company as an early leader in personal computers. Apple used that success to tap the public markets in 1980, raising $100 million during its highly anticipated initial public offering. That momentum carried Apple into the Fortune 500 by 1983.
The next chapter was less upbeat. Jobs was effectively fired in 1985 and Apple floundered after his departure. The once-promising computer company fell behind competitors like Microsoft and IBM, and its financial performance gradually deteriorated. In fact, Apple was on the brink of bankruptcy when the company reinstalled Jobs as CEO in 1997. His homecoming sparked a wave of innovation that put Apple back on the map.
Most notably, the company introduced the first iMac in 1998, the first iPod in 2001, and the first iPhone in 2007. That cemented its position as a premier consumer electronics brand, but Apple has continued to bring trendy devices to market ever since. Its hardware portfolio now includes MacBooks, iPads, AirPods, and Apple Watches, among other products and services.
Shareholders have benefited greatly from the company's capacity for innovation. The chart below shows how much Apple stock returned in each year since the iPhone launched in 2007, assuming all dividends were reinvested.
Chart by author. Shown above is the total annual return for Apple stock in each year since the iPhone was announced in 2007.
Apple is a consumer electronics leader, but services are key to future growth
Apple cultivated substantial brand authority due to its capacity for innovation, but the company has a truly durable economic moat because of its proprietary software. Specifically, its closed-source iOS operating system gives the company complete control over all aspects of the iPhone experience. It also means third-party manufacturers cannot run iOS on cheaper devices to create Apple-like products. Consumers who want the Apple experience have to pay for it -- and they do.
Apple derives a great deal of pricing power from its brand authority and proprietary software. For instance, the average iPhone costs nearly four times more than the average Android phone. That ability to command premium prices is important, but Apple must also grow its services business for the stock to be a worthwhile investment.
Apple has a strong presence in many consumer electronics verticals. It ranks second in smartphones, fourth in personal computers, first in digital tablets, and first in smartwatches. In total, Apple's installed base exceeds 2 billion active devices. But consumers buy hardware infrequently, so the company must monetize users with adjacencies like App Store downloads, iCloud storage, Apple Pay, and subscription products like Apple Music and Apple TV+.
Apple has a sizable footprint in several of those service categories. Most notably, it dominates the mobile application market, and it monetizes its leadership in two ways: transaction fees and advertising. Apple's App Store earns twice as much revenue as Alphabet's Google Play Store, and Apple is one of the fastest-growing advertising companies in the world.
Meanwhile, Apple has positioned itself as "the most formidable big tech player in payments," according to MoffettNathanson analyst Lisa Ellis. Apple Pay is the most popular in-store mobile wallet among U.S. consumers, with nearly three times more market share that its closest competitor.
Apple stock trades at an expensive valuation compared to growth prospects
Apple reported disappointing financial results in fiscal 2023. Total revenue fell 3% to $383.3 billion as high inflation suppressed consumer spending. Sales declined across every business segment except services. However, the company repurchased enough stock during the year to offset top-line weakness. Generally accepted accounting principles (GAAP) net income was essentially flat at $6.13 per diluted share.
The chart below details revenue (and revenue growth) across all five business segments in fiscal 2023, which ended on Sept. 30, 2023.
Chart by author. Shown above is the revenue across all five Apple business segments in fiscal 2023, which ended on Sept. 30, 2023.
Going forward, Wall Street expects Apple to grow earnings per share at 8.6% annually over the next five years. That consensus estimate makes its current valuation of 31.3 times earnings look quite expensive, especially when the five-year average is 26.5 times earnings.
Apple is an excellent business, but I doubt the stock can deliver market-beating returns from its current valuation. For that reason, I would personally wait for a cheaper entry point before buying Apple stock. But famous investor Warren Buffett might disagree.
