As a business that sells some of the most in-demand products and services on the planet, it’s not a surprise that Apple (NASDAQ: AAPL) has also made for a wonderful investment. Its shares have soared tenfold in the past decade. And they are up 58% in the last three years, a gain that exceeds the Nasdaq Composite Index‘s rise by a significant margin.
But while investors can certainly get excited about past returns, what we care about is what the future might hold. In that light, where will this top FAANG stock be in three years’ time? Let’s see if more market-beating returns are on the horizon.
In fiscal 2023 (ended Sept. 30), 52% of Apple’s $383 billion in total revenue came from a single product: the iPhone. That’s probably not a shocker to many people. Since this smartphone, widely considered the most successful hardware product ever, was first released in 2007, its importance to the overall company’s financial results can’t be overstated. Even with the 15th generation of the iPhone just being launched, this single product is vital to Apple’s success.
If we look out three years, it’s almost impossible to envision a scenario in which the iPhone doesn’t generate a substantial portion of business revenue. And that’s not necessarily a bad thing for Apple’s bottom line. The iPhone represents just 21% of global smartphone shipments but produces 82% of operating profits during the first three months of 2023.
While the iPhone is a gateway product that locks customers into Apple’s ecosystem, a legitimate argument can be made that it’s in the mature stages of its life cycle, especially in more developed markets, which are also the most financially lucrative. Each new iteration shows less of an improvement than previous updates, which encourages waiting longer to buy the upgraded product.
To its credit, the iPhone did register year-over-year sales growth in the most recent quarter (Q4 2023 ended Sept. 30), but outsized gains might be out of the question going forward.
Of course, anyone following Apple over the past few years will quickly notice that its services segment, which includes offerings like Pay, Card, TV+, Music, and iCloud, is ascending as a more important revenue driver. In fiscal 2023, services raked in $85.2 billion of revenue, representing 22% of the company’s total sales. And this figure was up 9% year over year, a better growth rate than products.
It’s reasonable to expect that things will continue on this path for the foreseeable future. Not only do services and software drive greater stickiness from Apple’s customers, it has also proven to be a valuable source of high-margin (gross margin of 71%) and recurring revenue.
Plus, as mentioned, products likely have much lower growth prospects going forward. By introducing new services to the mix, management can lean on another lucrative area to drive gains.
Returning to the original question of where Apple’s stock is likely to be three years from now, based on the discussion above, I don’t think past growth will repeat itself, so investors can expect probably mid-single-digit annual revenue increases in the years ahead. This is a mature business, after all.
But what about valuation? As of this writing, shares of Apple are trading hands at a price-to-earnings (P/E) ratio of nearly 31. It doesn’t matter what angle you view this situation from: This is an expensive price to pay for a company that lacks the outsized growth opportunities it had in previous years.
It’s hard to bet against a business like Apple. But I think it’s a fair assessment to doubt that market-beating returns are achievable in the next three years.
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