Apple (AAPL -0.35%) became the world's first $3 trillion company last June. By Dec. 14, 2023, its stock had hit its record high of $197.86, lifting its market cap to $3.08 trillion and seemingly securing its spot as the world's most valuable company.
But today Apple's stock trades at about $170 per share with a market cap of $2.63 trillion. Microsoft, which surpassed that market cap this January, is now worth $2.99 trillion. Let's see why Apple lost its luster over the past three months, if it can regain its footing this year, and if it can become a $3 trillion stock again by 2025.
Image source: Apple.
Why did Apple lose its luster?
The bulls abandoned Apple this year for four simple reasons. First, its sales of iPhones -- which accounted for 58% of its top line in its latest quarter -- are slowing down. Its iPhone sales dipped 2% in fiscal 2023 (which ended last September) and only grew 6% year over year in the first quarter of fiscal 2024 as the 5G upgrade cycle ended.
Competitive and macro headwinds in China exacerbated that slowdown. According to Counterpoint Research, Apple's iPhone sales in China plunged 24% year over year in the first six weeks of 2024 amid stiff competition from Huawei.
Second, Apple couldn't offset that slowdown by selling its other products. Its Mac sales fell 27% in fiscal 2023 amid the broader PC market's slowdown, then rose less than 1% in the first quarter of fiscal 2024. Its sales of iPads slumped during both periods, its Apple Watch sales were temporarily halted last December amid a patent dispute, and the Vision Pro remains a pricey niche gadget for tech enthusiasts. It also recently abandoned its decade-long plans to build an electric car. As a result, analysts expect Apple's revenue and earnings to only rise 1% and 7%, respectively, this year.
Third, Apple's valuations were inflated by a flight toward safe-haven stocks as rising interest rates and other macro headwinds rattled the market. Even after its year-to-date decline, Apple's stock still doesn't look like a bargain at 26 times forward earnings -- and its paltry forward dividend yield of 0.6% probably won't limit its downside potential.
Lastly, the European Commission recently hit Apple with a 1.8 billion euro ($1.95 billion) fine for banning streaming music rivals like Spotify Technology from informing its users of cheaper payment options outside of its App Store. Apple can easily pay that fine, but it could pave the way toward a broader crackdown on its entire services segment -- which serves more than 1 billion paid subscribers and is often cited as a catalyst for its long-term growth.
Will Apple lose its premium valuation?
Apple's near-term future is murky. During its shareholder meeting in late February, CEO Tim Cook claimed Apple would "break new ground" in generative artificial intelligence (AI) this year -- but that statement sounded like an eleventh-hour attempt to hop aboard the AI bandwagon that had previously driven Microsoft's stock to its record highs. Apple reportedly plans to add new generative AI features to Spotlight, its integrated search tool for Siri and iOS, but it's unclear if those upgrades will meaningfully widen its moat against Microsoft's Copilot and Alphabet's Google Assistant.
If Apple's AI plans fail to meaningfully boost its sales over the next few quarters, its stock could lose its premium valuation and be revalued relative to its near-term growth potential. From fiscal 2023 to fiscal 2026, analysts expect its revenue to only grow at a compound annual growth rate (CAGR) of 4% as its earnings per share (EPS) increases at a CAGR of 8%.
For reference, IBM -- which is growing again as it expands its hybrid cloud and AI businesses -- is expected to grow its revenue and EPS at CAGRs of 4% and 6%, respectively, from 2023 to 2026. Based on those expectations, IBM trades at just 22 times this year's earnings. It also pays a much higher forward yield of 3.4%.
If Apple is also revalued at 22 times forward earnings, its stock would drop another 15% to the mid-$140s, reducing its market cap to $2.2 trillion. So unless Apple can pull a few rabbits out of its hat, it probably won't impress the bulls and regain its $3 trillion valuation by the beginning of 2025. But over the long term Apple could still get its act together as it rolls out new products and services -- so it's still too early to write it off as a mature tech giant that has run out of room to grow.
