Where will Apple stock be in 5 years?

Apple (AAPL 1.03%) it didn’t rise to become the world’s most valuable company, with a market cap exceeding $3.4 trillion (as of August 19), without doing some things right. This is undoubtedly a wonderful business that has rewarded its shareholders immensely.

Just in the last five years, this”Magnificent seven” constituent skyrocketed by 333%, well ahead of time Nasdaq Composite Indexhis gain. But where will Apple stock be in five years? The answer might shock you.

Enhancement of Software and Services

The makeup of Apple’s businesses has transitioned over the past few years. To be more specific, software and services are becoming an increasingly important part of the company’s success.

Apple offers customers various offers. There’s iCloud, AppleCare, Pay, Card, Music, TV+, Fitness+, News+, Arcade and the App Store, all strengthening the company’s digital presence.

In the third quarter of fiscal 2024 (ended June 29), Apple reported $24.2 billion in software and services revenue, an 83 percent increase from the same period four years earlier. The gross margin on this segment 74% is superb, much better than that of the hardware division.

I think a valid argument can be made that without software and services, Apple would not be as dominant. The company has been tremendously successful because of its ecosystem, which includes the perfect combination of its hardware and software. The former might attract consumers, but the latter is what keeps them engaged and locked in.

“We have more than 1 billion paid subscriptions across all services on our platform, more than double the number we had four years ago,” CFO Luca Maestri said on the company’s Q3 2024 earnings call .

Apple is still an iPhone company

Of course, we can’t ignore the hardware piece of the puzzle. Of Apple’s $85.8 billion in sales in Q3, 72% came from products. And the vast majority is still derived from the iPhone, the crown jewel that is one of the most successful product lines in corporate history.

Five years from now, I’m sure software and services will grow in importance from both a revenue and profit perspective. But in 2029, the iPhone will still move the financial needle for this business. That’s not to say anything negative about the rest of the product range. AirPods, the Watch, the iPad and MacBooks have all been big winners for the company.

Apple’s AI push, known as Apple Intelligencepromises to make products and services even more useful to consumers in their daily lives. But at the end of the day, management and shareholders likely hope the new technology will result in higher iPhone unit sales. With the newest models set to launch later this year, we’ll have a clear look at demand trends.

If Apple hadn’t scrapped its rumored plans to launch an electric autonomous vehicle, we could have seen a major product launch in the next five years that could have really made a considerable impact.

Temper expectations

Apple is no longer a young, hyper-growth company. This is a mature company. And that’s evident when you consider that revenue grew just 5% last fiscal quarter after falling 3% in fiscal 2023.

Additionally, Wall Street consensus analyst estimates believe the top line will grow at an annualized rate of 6% between 2023 and 2026. That should come as no surprise. It’s hard to keep growing an annual sales base approaching $400 billion.

But the market has high expectations. Shares are traded at a price-earnings ratio (P/E) of 34. Over the past decade, the stock has sold for an average P/E multiple of 22, so it’s safe to assume that Apple is extremely expensive today.

My belief is that the valuation will prove not to be a tailwind for investors going forward. In fact, it could decline and become a headwind as the market accepts that Apple is now a low-growth business. Don’t be shocked if this stock underperforms the Nasdaq Composite over the next five years.