Since March 1, 2021, Apple (AAPL 2.48%) shares have climbed almost 50%. That gain is more than double the increase in the Nasdaq Composite Index over the same period. And it continues an impressive track record of this tech behemoth outpacing the broader market.
Even today, Apple shares aren't too far off their all-time high, as the artificial intelligence (AI) craze is still in full effect. But investors have their sights on the longer term.
Where will this "Magnificent Seven" stock be in three years?
Still a hardware company at heart
Launched in 2007 for the first time, the iPhone is the single product that made Apple the global cultural and business icon that it is today. We're 17 years past that point, and the popular smartphone still generated 52% of the company's 2023 revenue. At the end of the day, Apple is still an iPhone business.
Of course, numerous other products are offered, like the iPad tablets and MacBook laptops, as well as the Watch and AirPods. Combined, hardware accounted for 78% of fiscal 2023's revenues. But it's not a big growth driver anymore, as that sales figure was down 6% compared to the year before.
A finger can be pointed to the current macroeconomic climate, as higher interest rates and worries about a recession might discourage consumers from spending more on discretionary purchases. And the fact that newer devices have fewer game-changing updates makes it easy to delay buying the latest product introduction.
Some Apple supporters might have hoped that the business would stay on course with its plan to launch an autonomous vehicle. However, this project was recently scratched. The global car market is a massive industry that could've moved the financial needle for Apple, but I guess we'll never know what could've been.
If we look to 2027, there's no question in my mind, though, that the iPhone will remain Apple's bread and butter.
A growing business line
Astute readers will quickly realize that there's another part of the Apple empire that is quickly ascending to become more important. I'm talking about services and subscriptions, including services like iCloud, Pay, Card, TV+, Fitness+, and Music. This segment raked in $23 billion of sales in the latest fiscal quarter (the first quarter of 2024 ended Dec. 30), up 11% year over year.
While still a small part of the business, services have greater growth potential than hardware. And they are far more profitable, carrying a stellar gross margin of 73%.
From a purely competitive standpoint, services are what create the dominant Apple ecosystem. The business has 2.2 billion active devices worldwide, a number that gets larger with each passing quarter. This helps drive more and more of the high-margin and recurring revenue that comes from services and subscriptions. And it keeps consumers engaged and loyal.
As I mentioned above, I still expect products, particularly the iPhone, to carry the weight three years from now. But this up-and-coming segment shouldn't be ignored.
Getting in the way of outsized returns
In order to become one of the world's most valuable corporations, it's not surprising that a business has to be kind to its shareholders. And Apple is no exception. The stock is a huge winner, likely making many millionaires over the years.
However, if we view things with a fresh perspective today, shares aren't cheap. They trade at a price-to-earnings ratio of 28.2. That's a sizable premium to its trailing 10-year average. This indicates the optimism that Apple investors have.
If Apple was staring at a significant growth opportunity in the years ahead, that valuation might make sense. This just isn't the case. Consensus analyst estimates call for revenue to rise at an annualized clip of 4% between fiscal 2023 and fiscal 2026.
Consequently, there's a good chance the stock will underperform the Nasdaq Composite Index over the next three years.
