By virtually every measure, Apple (AAPL 2.21%) has been a huge winner for stockholders. In the past five- and 10-year periods, the shares have climbed 217% and 895%, respectively, trouncing the Nasdaq Composite. Investors would have loved to have the tech giant in their portfolios.
What's more, the stock has the approval of famed investor Warren Buffett, whose conglomerate Berkshire Hathaway owns a 5.9% stake in the FAANG stock. He's been a shareholder for over seven years now and has made a killing on the stock
But with a market capitalization of just under $2.8 trillion today, is it smart to buy Apple stock now?
Such a dominant enterprise
It's difficult to understate Apple's dominance. The business makes the most popular hardware products out there, including the revolutionary iPhone, iPad, Watch, MacBook, and AirPods. Currently, more than 2 billion active Apple devices are scattered across the globe, a sign of the company's ubiquity.
Hardware is still Apple's main revenue contributor by far, producing sales of $61 billion in the fiscal 2023 third quarter (ended July 1). And the leadership team remains focused on innovation. The latest upgrade to the iPhone is set to be introduced this month, which will surely draw strong consumer demand.
Consumer electronics companies typically aren't very special on their own. But what has made Apple truly unique is its ability to develop internal software that pairs seamlessly with its various hardware products. This so-called ecosystem is key to understanding why Apple has such tremendous customer loyalty and stickiness.
The services segment comprises software offerings like the App Store, iCloud, Apple Music, Apple TV+, and Apple Pay. This division currently represents about a fourth of overall company sales but has been posting faster growth than hardware. The fact that services also carry a much higher gross margin can be a boon to Apple's long-term profitability potential.
NASDAQ: AAPL
Key Data Points
Creating hugely successful hardware and software that exhibits durable demand and pricing power has resulted in a ridiculously pristine balance sheet. Apple generates insane amounts of free cash flow each quarter and currently has a net cash position of $57 billion.
That remarkable financial situation gives Apple tons of optionality to continue investing in game-changing technologies. Apple is reportedly working on an artificial intelligence (AI) chatbot. The business has already announced the Vision Pro, an AR/VR (augmented reality/virtual reality) headset. And there are even rumors that the business is designing an autonomous vehicle. With a fantastic track record of success, it's not easy to bet against Apple.
Hard to see market-beating returns
There are many things to like about this company, but the current valuation isn't one of those factors. Because the shares have performed so well in recent years and are even up 36% in 2023, they are not cheap by any stretch of the imagination. The stock currently trades at a trailing price-to-earnings (P/E) ratio of 29.7. That's much more expensive than the trailing 10-year average P/E multiple of 20.2.
The steep valuation is even more discouraging when you consider Apple's growth prospects. In each of the past three fiscal quarters, the business registered a year-over-year revenue decline. With such a massive sales base and widespread product penetration, the law of large numbers is kicking in, so it's not too surprising to see the gains slow. Wall Street analysts are forecasting just 6% annualized revenue growth between fiscal 2022 and fiscal 2027, a stark contrast to the 11.5% pace posted in the previous five fiscal years.
I don't think anyone in their right mind would doubt that Apple is one of the most successful businesses ever. But based on its current valuation, coupled with limited growth prospects, buying the stock today seems like a poor use of capital.
