Apple’s Stock Progress: Riding High Despite Market Uncertainty

Apple stock (NASDAQ: AAPL) has performed well this year, climbing about 23% since January. Currently valued at $3.5 trillion, Apple continues to hold its position as the world’s most valuable company, narrowly surpassing Nvidia. This marks a striking increase from its valuation of less than $1.5 trillion in early 2020. However, Apple’s stock performance has shown significant fluctuations over the past three years, with returns of 35% in 2021, a decline of 27% in 2022, and a rebound with 49% growth in 2023. In comparison, the Trefis High Quality (HQ) Portfolio, comprising 30 stocks, has maintained a steady performance, outperforming the S&P 500 consistently each year. HQ Portfolio stocks have offered better returns with reduced risk, demonstrating less volatility compared to the benchmark index.

Future Opportunities: Can Apple Reach a $5 Trillion Valuation?

Looking forward, speculations rise about whether Apple can achieve a $5 trillion market cap. Currently, there are concerns impacting Apple’s stock. The iPhone, its flagship product, appears to have peaked in 2022, and the initial reaction to its newest innovation, the Apple Vision Pro, has been underwhelming. Furthermore, Apple’s stock isn’t exactly a bargain, trading at 34 times estimated fiscal year 2024 earnings and 39.5 times trailing earnings. Yet, in spite of these challenges, achieving this valuation is still a possibility. The strength of Apple’s ecosystem and the potential for growth in services and artificial intelligence could contribute to further gains.

Service Sector Growth and AI Initiatives

Apple’s revenue has increased steadily, with an annual growth rate of 12% between fiscal years 2020 and 2023, reaching approximately $358 billion. While sales growth may slow to the high single digits in fiscal year 2024, projected at about $390 billion, opportunities for stronger growth remain, particularly in the services sector and through advancements in generative AI. If Apple achieves a 13% sales growth over the next three years, totaling a cumulative growth of about 45%, revenues would rise to roughly $565 billion. Several trends could stimulate this revenue increase in the coming years.

Although initial sales of the iPhone 16 have been modest, potential growth hinges on upcoming Apple Intelligence software updates, which will enhance features like Siri and introduce AI-powered tools. These updates are expected to roll out over the next few quarters. Many customers may delay their purchases until these enhancements are fully available, potentially leading to a surge in sales later in this product cycle. The new AI capabilities, exclusive to the iPhone 16 and 16 Pro models—with last year’s iPhone 15 Pro also included—could encourage users of older versions to consider upgrading.

Additionally, improved carrier deals for the iPhone 16 Pro in the U.S. serve as another advantage, with higher trade-in credits compared to last year. This could attract more customers to premium devices, and similar effects may be seen with the iPad and Mac products as well.

The Services sector is expected to play a crucial role in Apple’s growth. Revenue from services is driven by robust app sales and a growing number of paid subscriptions, which exceeded 1 billion in 2023, benefiting from over 2 billion active customer devices. Important partnerships, such as with Google, also boost growth. With many service revenues being recurring, this segment presents steady growth potential. Services sales reached $85 billion in fiscal year 2024 and are anticipated to rise to $97 billion this year, making it Apple’s fastest-growing segment. New AI-powered tools could further enhance growth opportunities in this area.

Profit Margins Set for Expansion

Apple’s net margins have steadily improved, increasing from about 21% in fiscal year 2020 to around 26% currently. There are projections these margins could climb to over 31% in the next three years. While premium device sales contribute to this growth, the rising impact of service revenues plays a significant role as well. Services provide much higher gross margins—about 74% year-to-date, compared to approximately 38% for hardware.

The percentage of service revenues is on the rise, as this segment is Apple’s fastest-growing business, currently accounting for nearly 25% of total revenue, up from about 19% in 2020. Apple’s historical focus on disciplined cost management also aids in improving margins. Combining a projected 45% revenue growth in the next three years with a 400 basis point increase in margins (up by 15%) suggests earnings could grow by about 67% or approximately 1.7 times.

If earnings increase by 1.7 times, the price-to-earnings (P/E) ratio could shrink to around 20 times, assuming the stock price remains unchanged. However, investors seemingly expect a more favorable scenario. If earnings expand to 1.7 times over the next few years, the P/E ratio may stabilize around 28 times, reflecting confidence in Apple’s continuing growth and expanding margins.

Thanks to a strong balance sheet and the recurring revenue from its services segment, Apple’s stock is likely to maintain a premium valuation even amidst market uncertainties. This sets the stage for reaching a market cap of around $5 trillion in the coming years. In terms of timing, whether this materializes in three years or four may not significantly change the outcome as long as Apple remains on its growth trajectory with stable margins.

Amid hopes for a smooth economic recovery following rate cuts, the question remains: How damaging could another recession be? Our dashboard, How Low Can Stocks Go During A Market Crash, provides insights into how key stocks have fared during and after the past six market crashes.

[1] Returns as of 10/16/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.