Could Buying Apple Stock Today Set You Up for Life?

Investing in Apple (AAPL -2.62%) has proven to be a lucrative choice over the years. A $1,000 investment in Apple back in 1980 would now be worth over $2.5 million. That's an extraordinary return, highlighting Apple’s journey to becoming one of the most significant companies in the world. Since then, Apple has provided returns exceeding 250,000%. The introduction of the iPhone in 2007 marked a pivotal moment for the company, transforming its path and defining the business we recognize today.

However, potential investors may wonder if Apple still holds enough potential for substantial wealth creation. Currently valued at over $3.8 trillion, the company has over 2.2 billion users relying on iOS devices across the globe. While Apple may not be in its prime growth phase anymore, it remains a unique and impressive enterprise that investors should not dismiss.

Can Apple Capture Lightning in a Bottle Again?

The impact of the iPhone cannot be overstated; it revolutionized the concept of mobile phones by eliminating the need for physical keys. Following the iPhone's launch, Apple witnessed incredible growth, with the company generating $391 billion in revenue in 2024. Notably, more than half of this revenue ($201 billion) originated from iPhone sales, accompanied by an additional $96 billion from subscription services, many of which are utilized on iPhones.

Although Apple traditionally releases a new iPhone each year, convincing consumers to upgrade has become more challenging in recent times. The first iPhone compatible with 5G networks was released in late 2020, and since then, revenue has plateaued.

This stagnation does not imply that Apple's growth is firmly over or that the iPhone has lost its appeal. Apple has developed a highly loyal user base, creating a robust ecosystem. Thus, it's likely that dedicated customers will continue to use and upgrade their devices over time. Nonetheless, Apple may require another groundbreaking product to replicate its previous investment success stories.

In early 2024, Apple launched its premium augmented reality headset, the Apple Vision Pro; however, production was reportedly cut significantly due to underwhelming sales. Moreover, while Apple introduced artificial intelligence software in its latest iPhone release, initial consumer feedback suggests limited impact on sales.

Apple's Financial Engineering Provides Stability

It is essential not to overlook Apple's resources and loyal following. The company can bounce back if it introduces a successful new product, given its capacity to rapidly grow offerings that resonate with users. Apple is also widely recognized for its adept financial engineering.

Apple effectively utilizes its profits to increase shareholder value. In 2024, it generated $108 billion in free cash flow from its $391 billion in revenue. The company offers a dividend that has seen increases for 12 consecutive years and invests heavily in share buybacks to lower outstanding shares and boost profitability per share. Consequently, over the past decade, Apple has reported a 95% revenue growth, while earnings per share surged over 227%.

Growth in earnings per share usually translates to a higher stock price. Hence, Apple could still emerge as a valuable long-term investment, even without considerable revenue growth, as long as the company continues to generate cash flow from its operations. The services sector, which is Apple's most rapidly expanding and profitable segment, is likely to enhance its future earnings further.

It Might Not Be the Right Time to Buy Shares

While Apple’s track record of boosting earnings per share is impressive, it does not entirely substitute for the necessity of actual revenue growth.

Investors must be cautious not to overvalue Apple stock while the company seeks a new growth catalyst. The optimism regarding Apple's potential innovations, particularly around Apple Intelligence, appears to be reflected in the stock's current price. The price-to-earnings (P/E) ratio has reached its highest point in years, with a forward P/E ratio of 34 when assessed using 2025 earnings forecasts.

If current analyst projections hold true, Apple may average around 13% to 14% annual earnings growth over the next three to five years, which seems steep at this valuation. This results in a price/earnings-to-growth (PEG) ratio of 2.5, which is about as high as an investor should consider for a quality stock like Apple. Such a valuation exposes investors to potential downside risk if the company fails to meet expectations.

Even though Apple is an outstanding company, achieving strong returns may prove more challenging due to its size and current valuation unless a new transformative growth driver emerges. Until that happens, investors should manage their expectations and approach the stock with caution.

Investment, Apple, Stock