A company doesn't get to a market cap of $3.3 trillion without doing some things right. This is exactly the story with Apple (AAPL -0.57%), one of the most dominant businesses on the face of the planet.
This type of success has made this "Magnificent Seven" stock a huge winner for investors. Shares have skyrocketed 838% in the past decade, a gain that outpaces the broader Nasdaq Composite index by 10 percentage points annually.
Prospective investors might have their eyes on Apple right now. But is it too late to buy the stock?
Many favorable qualities
It's hard for anyone to contest the assertion that Apple is a great company. In fact, it's such a high-quality business that even Warren Buffett's Berkshire Hathaway owns a sizable chunk, a position that represents 43.5% of the conglomerate's $388 billion portfolio.
Apple has arguably the strongest brand in the world, one that has been built up over the years thanks to its popular products and services. This brand has allowed the company to flex its pricing power. And the combination of hardware and software creates an extremely powerful ecosystem that drives customer loyalty and stickiness.
We also can't forget about Apple's tremendous financial position. The company's operating margin has averaged a superb 28.1% in the past five years. And this outsize profitability has resulted in the generation of vast amounts of free cash flow that management primarily uses to repurchase shares. A net cash position of $58 billion also reduces risk, which should virtually eliminate any fears that Apply will ever run into financial trouble.
Innovation still runs hot at Apple. The business revealed its highly anticipated artificial intelligence (AI) push, known as Apple Intelligence, recently at its Worldwide Developers Conference. There are numerous new features that essentially make Apple's products and software a tool that can help people be more productive and creative in their daily lives, all with privacy and security as a top focus.
Potential for returns
For all of the attractive qualities Apple possesses, a fact that no one will deny, investors need to think critically about what the potential is to achieve strong returns going forward.
With Apple's latest foray into AI, the hope is that sales of the iPhone will accelerate. In its latest fiscal quarter (Q2 2024 ended March 30), this single product accounted for about half of overall company revenue. Growth has certainly slowed in recent years as consumers feel less obligated to regularly upgrade to the latest device.
Perhaps AI can change this. That's especially the belief since the features will only be available on the 15 Pro and 15 Pro Max, the latest models, as well as yet-to-be released models.
But I'm not so optimistic about this rosy outcome, particularly in the current inflationary environment we are in. And even if iPhone sales pick up, it is a monumental task moving the needle on a gargantuan trailing-12-month revenue base of $382 billion. In other words, it takes a lot of work for Apple to drive meaningful growth. Unless there is a new game-changing product in the works, investors should probably temper their expectations.
However, Apple shares are priced as if outsize growth is a certainty. The stock trades at a price-to-earnings ratio of 33.1. That's 55% more expensive than the trailing-10-year average. Investors remain extremely bullish.
Based on its limited growth prospects and steep valuation, I do believe that it's too late to buy Apple stock right now. Shares aren't likely to outperform the broader Nasdaq Composite over the next few years.
