Predicting the Future Location of Apple's Shares in a 5-Year Span
Apple Inc. (AAPL, up by 1.50%) currently holds an astounding market value of $3.4 trillion (as of Nov. 9), making it a standout corporate success tale in America. Its reputation as an innovator and disrupter, placing customer needs at the forefront, has played a significant role in its ascent to its dominant position.
Over the past five years, the company's shares have experienced a staggering 249% increase, outperforming the broader Nasdaq Composite index. However, the question remains: What lies ahead for this "Magnificent Seven" stock in the next five years?
The iPhone's continued influence
In the fiscal year 2024 (ending Sept. 28), Apple reported a revenue of $391 billion, with 75% derived from hardware sales. The portfolio includes the iPhone, MacBook, iPad, and Watch, among others. Notably, the iPhone alone accounts for over half of the total revenue. While the iPhone has been around since 2007, I strongly believe it will continue to be the primary source of financial success for Apple in 2029.
On the one hand, the maturity of the iPhone product line might make some shareholders uneasy. Each new release introduces fewer groundbreaking changes that incentivize consumers to upgrade.
On the other hand, the advent of Apple Intelligence could be the catalyst needed to ignite another upgrade cycle. "Apple Intelligence," as stated by CEO Tim Cook during the Q4 2024 earnings call, promises to be a compelling reason for customers to upgrade.
There's no denying the widespread use of Apple products worldwide. Over 2.2 billion active devices are currently in circulation (data from the most recent two quarters). This impressive figure continues to grow, suggesting that there's still a substantial market for selling additional hardware products.
Transitioning to a software powerhouse
Last fiscal year, 25% of Apple's revenue came from services, such as Apple Pay, TV+, iCloud, and ads, among others. Service revenue saw a growth of 11.9% in Q4, outpacing the 4.1% increase in hardware sales. The services sector also boasts an impressive gross margin of 74%.
As the hardware segment reaches a mature stage, the services division is expected to drive faster growth. Consequently, it's reasonable to expect the services sector to become increasingly vital to Apple's financial health as we look ahead to the next five years and beyond. It will add high-margin and recurring revenue to the mix, a development that shareholders will appreciate.
Moreover, it's challenging to overstate the importance of software and services in the competitive landscape. They help to bolster Apple's powerful ecosystem, which keeps consumers engaging with Apple products and discourages them from using rival offerings.
Managing investor expectations
While the iPhone will undoubtedly continue to be critical to Apple's success in the coming years, the services sector is likely to become increasingly significant to the overall financial picture. However, overall growth may not be as impressive as in the past given the size of the business already.
Wall Street consensus estimates suggest that revenue and earnings per share will grow at compound annual rates of 7% and 10.6%, respectively, between fiscal 2024 and fiscal 2027. These rates are healthy, but they may not justify the current valuation.
Apple currently trades at a price-to-earnings ratio of 37, significantly higher than its trailing-five- and 10-year averages. This is a hefty premium for investors to pay.
In summary, Apple has been an exceptional investment over the past five years. However, I wouldn't be surprised if its growth rate falls behind the Nasdaq Composite index in the next five years.
In light of Apple's substantial reliance on hardware sales, particularly the iPhone, some investors might express concerns about the potential for slower growth due to the maturity of its product line. However, the introduction of new technologies like Apple Intelligence could stimulate another upgrade cycle and maintain its financial success.
As Apple transitions towards becoming a software powerhouse, with services accounting for a quarter of its revenue and boasting a high gross margin, investors should anticipate a shift towards faster growth in this sector, contributing to Apple's overall financial health in the coming years.
