Apple's (AAPL 0.60%) stock chart is a thing of beauty. Shares of this tech heavyweight are up 54% in the past three years. That gain easily outpaces the 22% rise of the Nasdaq Composite index.
As this "Magnificent Seven" stock currently trades near its all-time high, investors might be considering adding the business to their portfolios. So it's important to ask, where will Apple be in three years?
Still an iPhone company
Apple's monster success can largely be attributed to the popularity of the iPhone, which bucks the typical short lifespan and deflationary trend of consumer electronics. A whopping 17 years after its introduction, this single product still represents about half of the company's total revenue.
The management team is still focused on growing iPhone sales, with a new update slated to launch later this year. Apple has also finally opened retail stores in India, hoping to further tap the world's most populated country.
In 2027, I believe there's a very good probability that this business will still depend on the iPhone for its financial success. Yes, Apple sells other well-known products, like the Watch, AirPods, MacBook, and iPad. But its industry-leading smartphone still reigns supreme.
Investors should understand the downside of this, though. The iPhone is a mature product, as there are about 1.4 billion of these devices that are active across the world. So, it will become harder to drive outsize revenue gains.
At a $3 trillion market cap and with trailing-12-month revenue of $382 billion, Apple will probably need to introduce a new game-changing product to drive faster revenue growth. There is no reason for investors to be optimistic about this happening.
Creating Apple's ecosystem
In addition to its successful hardware devices, Apple has done a fantastic job at boosting its services division. In the latest quarter (the fiscal second quarter of 2024 ended March 30), this segment grew sales 14% year over year to $24 billion, accounting for 26% of the company's total. Three years ago in Q2 2021, services only represented 19% of overall sales.
I see no reason to believe that this trend won't continue over the next three years and beyond. For Apple shareholders, that's an encouraging sign. Services carry a stellar gross margin of 75%, well above the 37% gross margin of products. As more sales are derived from services, perhaps Apple's bottom line can expand even faster than the top line.
Apple's services include popular offerings like Music, Pay, and TV+. Going forward, the little-known advertising operations could become more important. Apple sells digital ads across its properties, like in the App Store and in the News app, for example. Despite being relatively new to the industry, the business is expected to bring in $10 billion in ad revenue this year, according to eMarketer.
Not a good setup for investors
Thanks to Apple's incredible run in recent years, the stock is very expensive right now, in my opinion. Shares trade at a price-to-earnings ratio of 29.9, which is a 40% premium to their trailing-10-year average. The takeaway is that the market remains extremely optimistic about the company's prospects.
But given that Apple is likely to register slower revenue growth in the years ahead, particularly as a result of its massive scale and the maturity of the iPhone, I don't think the current valuation presents investors with a good buying opportunity. The higher valuation creates a scenario where the chance of earning market-beating investment returns over the next three years is low.
There's no denying that Apple is one of the world's most successful enterprises. But that doesn't automatically make it a great investment opportunity. I wouldn't be surprised if the stock underperforms the Nasdaq Composite over the next three years.
