There’s no question that this tech giant has been a wonderful investment in the past.
Without a doubt, Apple (AAPL 0.36%) has been one of the most successful investments anyone could have made. In the past 10 years, shares of the consumer technology giant have produced a total return of 932%. That gain trounces the 265% total return of the S&P 500.
Today, Apple is the world’s most valuable enterprise, with a market cap that’s just shy of $3.6 trillion. Because this is such a massive corporation with a huge sales base, forward returns are surely not going to come close to resembling the past.
But could investing $1,000 in this “Magnificent Seven” stock still make you a millionaire one day?
Apple is a wonderful company
I believe Apple should be on every long-term investor’s watch list. That’s because this is a fantastic company.
It has one of the widest economic moats, mainly due to its strong brand presence. Consumers across the globe have a high affinity for the company’s products, resulting in robust demand over the years, as well as proven pricing power.
Other businesses can only dream about being as financially sound as Apple is. In the past five years, the company’s operating margin has averaged a superb 28.8%. The combination of premium-priced products and operating leverage has led to outsize profitability.
That has translated to tremendous operating cash flow: $91 billion in the first nine months of fiscal 2023. Apple has so much cash that it doesn’t know what to do with it, even though it repurchased $26 billion worth of shares and paid $3.9 billion in dividends in the latest fiscal quarter. As of June 29, the company had $52 billion of net cash on the balance sheet.
I’ll also point to Apple’s powerful ecosystem, which is the combination of its hardware and software offerings. It develops its own services and software, making its products even stickier for users. Services revenue has been growing at a faster pace than product sales, and they carry a higher gross margin.
It also doesn’t hurt that Warren Buffett-led Berkshire Hathaway is a big shareholder. The conglomerate owns 2.6% of Apple’s outstanding shares. That’s certainly a vote of confidence.
Lower your expectations
There is no shortage of reasons to appreciate this business. Apple is undoubtedly one of the highest-quality companies on the face of the planet, but that doesn’t mean the stock is an automatic buying opportunity for you. In fact, I believe it makes for a terrible investment idea right now.
The single reason I feel so strongly about this comes down to valuation. Shares trade at a price-to-earnings ratio of 35.1. This represents a 59% premium to their trailing-10-year average. The market has clearly become more optimistic toward the business.
The only time it would make sense to pay such a steep valuation is if Apple was registering phenomenal growth. But this simply isn’t the case right now. In fiscal 2023, sales dipped by 2.8%. And through the first three quarters of fiscal 2024, revenue rose by less than 1%.
The iPhone, Apple’s most important product, is now at a very mature stage of its life cycle, with fewer game-changing updates that can encourage consumers to constantly upgrade their devices.
Moreover, Wall Street consensus analyst estimates call for earnings per share to grow at an annualized pace of just 10.9% between fiscal 2023 and fiscal 2026. That outlook doesn’t justify paying a historically expensive valuation.
In my opinion, it’s not smart to buy Apple shares right now. And to add to that point, putting $1,000 in the stock is not likely to turn the average investor into a millionaire.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
