Apply (AAPL +1.17%) regained its title as the largest company in the world and currently leads second-place Microsoft by about 11%. That's a sizable lead, which may cause some investors to wonder if Apple stock is a buy right now.
Let's take a look, as the answer may surprise you.
Apple Intelligence needs to succeed
Apple's business isn't difficult to understand. It mostly sells hardware, such as phones, laptops, and tablets. However, it also offers some subscription services.
While the subscription part of the business may be a smaller part, it's really the only part that has performed recently. In the third quarter of fiscal year 2024 (ending June 29), sales in its Services division rose 14%. While Mac and iPad sales also grew in Q3, iPad sales significantly shrunk in Q2 and Q1.Besides that, all of its other divisions shrank in Q3, including its largest segment: the iPhone.
Overall, it has been a hard road selling its hardware over the past few years, but Apple investors are hoping a new technology could spur a round of upgrades.
Apple recently announced its take on artificial intelligence (AI): Apple Intelligence. This feature is due for beta release sometime this fall and is Apple's integration of generative AI into its ecosystem. Although it lags well behind its Android competition in this integration, it will likely still be a hit due to the loyal Apple following.
NASDAQ: AAPL
Key Data Points
Two factors are at play as to why it could improve Apple's current business state. First, these features will only be available on iPhones 15 Pro and Pro Max or new models. This means that some cheaper models and all of the existing phones will be excluded from Apple Intelligence, which some estimate to be 90% of the iPhone user base. This could drive a massive upgrade cycle when the iPhone 16 launches later this month, which would provide Apple a much-needed sales boost.
Second, it's likely that Apple is also playing the subscription game here. Apple's competitors are offering AI tools for free on their devices for a limited time. After a year, a subscription fee will likely follow, which may irk the consumer but will be a huge boost to Apple's recurring revenue if it becomes a must-have feature.
These two factors are why Apple has regained its title as the world's largest company, but if this initiative fails, the stock could be in for trouble.
A blind examination of Apple's stock reveals overvaluation
If I were to present you with the following information about a stock, would you buy it?
| Metric | Figure |
|---|---|
| Last Quarter Year-Over-Year Revenue Growth | 4.9% |
| One-Year Average Year-Over-Year Revenue Growth | 0.5% |
| Forward Price-to-Earnings Ratio | 33.3 |
Data source: YCharts. YOY = Year over Year.
You'd probably think that's an expensive stock for hardly any revenue growth, but that's where Apple is trading at. Now, let's compare three more companies.
| Metric | Company A | Company B | Company C |
|---|---|---|---|
| Last Quarter Year-Over-Year Revenue Growth | 22.1% | 13.6% | 122.4% |
| One-Year Average Year-Over-Year Revenue Growth | 24.3% | 13.4% | 213.8% |
| Forward Price-to-Earnings Ratio | 24.1 | 20.6 | 38 |
Data source: YCharts. YOY = Year over Year.
All of those look like far more attractive investments, as A and B are growing much faster and trade at a far lower price tag than Apple. Or, company C is growing at a rapid pace but isn't that much more expensive.
Company C is an easy guess: Nvidia. But A and B may be a bit more tricky: Company A is Meta Platforms, and Company B is Alphabet.
These two are doing far better than Apple from a business perspective but don't have near the pedigree that Apple stock does. So, does Apple deserve the premium? I'd say no.
For Apple's valuation to reach the same levels as Meta or Alphabet, its earnings would need to increase by about 50%. That's a tall task even if Apple's iPhone sales ramp up, and it's likely-to-launch Apple Intelligence subscription does well.
Apple holds a huge premium over its peers but doesn't have much to show for it. As a result, I think there are far better buys in the market than Apple, and investors would be better off looking at one of its peers for an investment right now.
