By selling some of the most in-demand hardware devices on the face of the planet, Apple (AAPL 2.15%) has become one of the most dominant enterprises out there. Its current market cap of $2.8 trillion attests to this.
Unsurprisingly, this FAANG stock has been a massive winner for shareholders. It has skyrocketed 856% in the last decade, crushing the gains of the Nasdaq Composite Index and S&P 500.
Is it too late to buy Apple?
Growth will be hard to come by
According to Wall Street analyst estimates, Apple's revenue will increase at a compound annual rate of 4.2% between fiscal 2023 and fiscal 2026. This would represent a huge slowdown from the 8.4% yearly top-line growth of the past decade. This shouldn't come as a shock to anyone, though.
Apple is a gargantuan enterprise today. Management says there are 2.2 billion active devices worldwide, demonstrating the company's ubiquity. It's extremely difficult to continue posting rapid growth on top of a fiscal 2023 sales base of $383 billion.
Making matters more challenging is the maturity of the iPhone, Apple's flagship product line, which generated 58% of total company revenue in the last fiscal quarter (Q1 2024 ended Dec. 30). But with newer upgrades having less game-changing innovations, consumers won't have a problem delaying buying the latest iPhones.
Investors will point to the budding services division, which reported 11% year-over-year revenue growth in Q1. But because this segment relies on more product sales in the first place, its potential is restricted by hardware demand trends.
I believe it's totally reasonable to assume that Apple's expansion will be much more muted in the years ahead.
NASDAQ: AAPL
Key Data Points
High-quality business
Just because growth won't be spectacular doesn't mean this isn't a great business.
For starters, Apple possesses one of the most powerful brands in the world. This not only leads to tremendous pricing power and customer loyalty, but it also protects the company from the constant threat of competition. Apple's various offerings are truly differentiated in the industry.
Even more impressive is the company's incredible profitability. In the last five years, Apple's operating margin has averaged 27.8%.
And generating cash isn't a problem. Apple produced positive free cash flow of $304 billion combined in the last three fiscal years. Management does a great job returning capital to shareholders via buybacks and dividends.
The balance sheet is in pristine condition. As of Dec. 30, Apple carried $108 billion of debt on the books. That's not a concern at all, given that the business currently has $173 billion of cash, cash equivalents, and marketable securities on the asset side.
Investors don't need to worry about a potential recession. Apple always seems to operate from a position of strength.
The investing angle
It looks like the market is fully aware of just how great this business is. This is indicated by the price-to-earnings (P/E) ratio of 27.8. That's much more expensive than the stock's trailing-10-year average of 21. And it represents a huge premium to the S&P 500.
It's best to view things with a fresh perspective. Investors are being asked to pay a premium valuation multiple for a company that is likely to register muted growth going forward. Even if you consider Apple's other favorable qualities, namely the brand and financial picture, I just don't view this as a smart bet to take.
This isn't to say that it's too late to buy the stock. My perspective is that Apple would still make for a wonderful investment, just if the P/E ratio came down considerably.
