An already dominant business is struggling to boost its top line.
Apple (AAPL 0.50%) is currently the world’s second-most valuable company, sporting a market cap of nearly $3 trillion. This is undoubtedly one of the most successful companies we’ve ever seen.
But with Apple raking in a whopping $383 billion in revenue in fiscal 2023, investors are right to question the potential of forward gains. Before you rush to buy this “Magnificent Seven” stock, here’s my biggest bear case.
Lack of growth
There aren’t many companies producing higher sales than Apple. That’s a sign of just how dominant this business has become. However, it also points to the fact that future growth for this consumer tech giant isn’t likely to resemble the past, which I believe is the most prominent bear case investors need to understand.
Last fiscal year, Apple’s $383 billion in revenue represented a 2.8% year-over-year decline. This was after the company reported three straight years of positive sales growth. In the latest quarter (second quarter of 2024, ended March 30), revenue declined 4.3%. Management called out tough comparisons to last year as the reason for the top-line dip.
One key critique of Apple is that it hasn’t been able to introduce another game-changing product that can move the needle. Plans to develop an electric vehicle were abandoned, maybe due to soft industry conditions. The car market is one of the few industries large enough to have been able to make a difference for Apple.
Its main business driver that accounted for about half of total revenue last fiscal quarter is still the iPhone, a product that has been around since 2007. This is a mature product that will naturally see lower growth, primarily as consumers don’t feel the need to constantly upgrade to the newest version.
For what it’s worth, Apple is set to reveal its artificial intelligence strategy in June. Perhaps there are new features that could drive demand for Apple’s hardware meaningfully higher.
Nonetheless, it’s extremely difficult to move the needle when the annual sales base is already approaching $400 billion. Apple’s revenue is set to rise at a compound annual rate of just 4.6% between fiscal 2023 and fiscal 2026, according to Wall Street consensus estimates.
Dominant business
To be clear, Apple is still a high-quality enterprise that should remain on investors’ radars. There are many attractive qualities the business possesses. It might be the strongest brand in the world. This helps Apple drive customer loyalty, while at the same time benefit from proven pricing power.
Plus, this is an extremely profitable company that generates tens of billions of dollars in free cash flow each quarter. Add all these positive attributes to Apple’s pristine balance sheet, and it makes sense why noted investor Warren Buffett owns shares.
But before buying a stake in a company, it’s worthwhile to ask where the returns will come from. In this instance, revenue and earnings growth are likely to be muted in the years ahead, at least when compared to previous years.
Valuation is another variable to think about. If you buy a stock that’s cheap, the potential for multiple expansion can be a huge driver of returns, particularly as the market begins to appreciate a company.
As of this writing, Apple trades at a price-to-earnings (P/E) ratio of 29.9, which is 40% more expensive than its trailing-10-year average. In other words, expectations have rarely been higher for this business in the past decade, despite its outlook usually not being this weak.
Therefore, the only time investors should consider buying Apple stock is if the P/E multiple contracts significantly. But it’s hard to know if or when this will happen. Even during a time when the company is struggling to put up any kind of growth, shares are still expensive.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.