As investors bask in the glory of a 20% surge in the S&P 500 this year, the laggard Apple (NASDAQ: AAPL) has a contrary tale to tell. While the tech giant boasts an 18.3% stock price uptick, it trails the broader market by 2 percentage points. Still, with its towering $3.5 trillion market capitalization, Apple’s history of shareholder bounties speaks volumes.
But is Apple’s stock poised to reclaim its former glory in the coming year? That, my friends, hinges on a meticulous examination of the company’s long-term prospects and prevailing valuation.
Image source: Getty Images.
A Fresh Phone for Renewed Growth?
Apple’s cash cow, the iPhone, reigns supreme over its revenue stream, representing a hefty 52% of the $296.1 billion top-line cake for the first nine months of the fiscal year. But the party’s turning sour with iPhone sales witnessing erosion, pinned down by fierce competitors like Huawei. The recent quarter saw iPhone revenue dipping 1% to $39.3 billion.
Even more concerning is the hemorrhaging of market share. Apple’s slice of the smartphone pie dwindled to 15.8% in the second quarter, from 17.3% in the previous period, and 16% a year ago.
Apple has pinned its hopes on a new iPhone iteration, armed with flashy features like artificial intelligence (AI). Will this upgrade persuade existing users to splurge on the pricier models or attract fresh converts to the Apple gospel? The answer remains wrapped in uncertainty. Early sales reports suggest a lukewarm reception, but clarity may dawn post the upcoming quarterly earnings revelation.
Can Services Uphold the Mantle of Growth?
Amidst the gathering storm, Apple’s fortress of services stands tall. This bastion includes ad revenues, product support, cloud services, the App Store, and payments.
The latest quarter rang in service sales at $24.2 billion, boasting a far superior gross margin of 74% compared to the product segment’s 35.3% margin.
However, the ominous clouds of legal tussles loom large, as the U.S. government and several states accuse Apple of orchestrating an iPhone monopoly that shackles consumer choice and app innovation. This dogfight could spell trouble for Apple’s service profitability in the long run.
Furthermore, Apple’s grand Vision Pro foray earlier this year hasn’t set the world alight, with lackluster sales of its pricey augmented and virtual reality headset. Initial estimates of 450,000 units fall massively short of the initial 800,000 projection.
The Verdict
Apple shares have donned a richer cape over the past year, commanding a snazzy price-to-earnings (P/E) ratio of 34, up from about 28 a year ago.
The company’s stock now flaunts a loftier multiple compared to the S&P 500’s P/E of 30, rendering it pricier than the broader market index of large-cap stocks.
But is the premium justified in the face of gloomy growth prospects? With the iPhone losing its luster, new AI bells and whistles falling short of salvation, and legal battles threatening service supremacy, the caution flags are waving. It might be prudent to wave the white flag on any Apple holdings in your portfolio.
When our analyst folks offer up stock tips, ears must prick up. After all, Stock Advisor’s staggering average return of 781% outshines the S&P 500’s modest 168%.*
So, let’s grab some popcorn and stay abreast of the unfolding saga. Is Apple set for a triumphant revival or a sobering reckoning? Time will surely tell.
