Apple (NASDAQ:AAPL) stock is having a good year despite analyst reservations. Shares are up 47% in 2023 and are within just a few percentage points of the all-time high it hit in July. The tech giant is also a member of the so-called Magnificent 7 group of stocks that drove the S&P 500‘s performance for the past year.
Because the S&P 500 is a weighted index, Apple’s performance still has a meaningful impact on returns. It accounts for 7.4% of the total, the largest amount of any component stock. The tech leader was the first company to cross the $3 trillion valuation threshold. Let’s see whether it can climb the next rung higher in 2024.
Apple’s Path to $3 Trillion
The saying “the first million dollars is the hardest” could apply to Apple, though you should add on a few zeros. Apple went public in 1980 and it took the company 38 years to become a trillion-dollar stock. It only took the iPhone maker two more years to achieve its next trillion dollars. Going to $3 trillion was a bit trickier, but it did so for the first time at the end of June. The next trillion might not be so easy.
Although Apple often surprises Wall Street with its sales figures, 2023 was admittedly a bit of a disappointment. The iPhone accounts for 52% of total sales and it hit record revenue in the fourth quarter, but growth was anemic. For the full year, in fact, revenue was down 2.8%. Every other product Apple sells was also lower year over year, including Macs, iPads, and wearables.
Apple’s lone bright spot was services where revenue was up 9%. Services, though, only account for 22% of sales. That’s way more than in past years and is the future growth lever of the company, but it wasn’t enough to offset weakness in the rest of Apple’s business.
Profits were also lower from last year though per-share earnings inched higher to $6.16 per share. Apple achieved that by buying back over a half million shares.
Quality at a Price
So there seems to be a disconnect between Apple’s actual business performance and its stock. The tech giant is soaring despite mediocre fundamentals. Its shares also trade at a substantial premium.
The stock goes for 26 times next year’s earnings and over 5 times its projected earnings growth rate. Where Apple earnings grew 15% annually over the past five years, Wall Street estimates they will only expand 6% a year going forward. It also trades at 7 times sales and 30x its free cash flow.
Paying up for quality is a viable strategy but does Apple’s slowing growth warrant it? Sales are only forecast to grow 3% and with anemic profit expansion, the market may not want to support such lofty valuations anymore.
Even so, there’s a reason Warren Buffett loves Apple. It occupies nearly half of Berkshire Hathaway‘s (NYSE:BRK-A)(NYSE:BRK-B) portfolio.
Buffett told shareholders, “Apple is different than the other businesses we own. It just happens to be a better business.”
It’s also a cash-generating machine with over $60 billion in cash and marketable securities. Investors can expect to see more of it returned to them in the form of more stock buybacks and dividend payments.
Multiple Paths Forward
I’m not certain Apple will hit a $4 trillion valuation next year. Slower sales and profit growth point to a meandering 2024. However, it would only require the stock to get to $255 or 32% above where it stands now. After this year’s performance, it’s not out of the question. Apple’s services business, artificial intelligence, and new Vision Pro headset are all wildcards that could cause sales to spike.
I think there is little question it will eventually get there and will probably do so before anyone else. Its substantial strengths make Apple a great stock to own no matter what its ultimate valuation is.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
