Summary
Apple has become a Peter Lynch "Slow-Grower" with minimal recent growth and failed new product attempts like Apple Intelligence and Vision Pro.
Despite high profitability and operational efficiency, Apple's valuation at 30 times forward earnings is disconnected from its growth prospects.
The "Upgrade Super Cycle" narrative seems unrealistic, as Apple Intelligence features have not driven higher sales or user engagement, generating an abundance of criticism.
Given the high valuation and overestimated growth projections, I reiterate Apple stock as a 'Sell'.
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Apple has been a notable outsider in a period of fast growth, accelerated investments, AI innovation, and record capital spending from all its big-tech peers.
Perhaps this is what Apple investors want, a management team that conservatively squeezes the juice of the unbreakable Apple ecosystem.
That said, it's important not to get delusional here and avoid falling for the "Upgrade Super Cycle" story. If you've tried using any of Apple Intelligence's features, then you already know.
Let's dive in.
Apple's Rise To The Top Of The Food Chain
When it comes to consumer hardware, there's Apple, and there's everybody else. Since the iPhone launch about 18 years ago, Apple gradually and steadily built an unbreakable ecosystem with essential software services, and accessories like the AirPods and the Apple Watch.
For much too long, the market viewed Apple as just another consumer electronics company, which meant it wrongly placed a low multiple on one of the widest moat companies in the world.
Then, came one Warren Buffett, and back in 2016, he identified that Apple's story is severely underappreciated by the market. The rest is history:
Data by YCharts
Apple has grown over 9x since early 2016, to become the best-performing stock among big tech, significantly outperforming the S&P 500 (SPY) and the Nasdaq 100 (QQQ).
However, in recent years, it's hard to deny the Apple train has lost some steam. Growth has been non-existent, and there hasn't been a true revelation when it comes to new products or services. In fact, Apple uncharacteristically had several failed attempts, like the Vision Pro and Apple TV+.
In a series of articles, I transitioned from being an Apple bull to an Apple bear as the company's valuation disconnected from its prospects. Where do we stand now? Let's find out.
Big-Tech Outsider On Both Growth & Spending
There are plenty of stages in a successful company's life, but Peter Lynch's three broad stages provide a useful framework.
There's the "Fast-grower" stage, during which the company is typically unprofitable but growing fast (roughly speaking, above 20% annually). Then, there's the "Stalwart" stage, which is defined by 10%-15% growth, with rising profits and operational leverage. Lastly, there's the "Slow-grower" stage, where a large company is growing at a low-single-digit pace, seeking to capitalize on a historically dominant position while maintaining market share and profitability.
I don't think anyone can put Apple under any category other than "Slow-grower".
Created by the author using data from Apple reports.
In the recently announced quarter, Apple revenues grew 3.7%, once again led by services, which were up 11.9%, compared to Product revenue which increased by 4.1%. Geographically, all regions, except China, experienced growth, with Japan, Europe, and Asia Pacific accelerating, the Americas decelerating, and China coming in at -0.3%.
Created by the author using data from Apple reports.
As typical to a stalwart with a dominant position, Apple continues to improve the efficiency of its operations and break profitability records, helped by the higher portion of Services revenues.
This has led to an all-time high operating margin of 31.5%, and the second-best year in terms of free cash flow, which once again surpassed $100 billion.
The way I see it, this was a perfect example of a good "Slow-grower" quarter. Meanwhile, the rest of big tech is growing at least revenues by a double-digit percentage while aggressively investing in AI and other significant opportunities.
The False Upgrade "Super-Cycle" Promise
Theoretically, the only path for a "Slow-grower" to bring returns that are on par with Stalwarts or fast-growers is if it's highly profitable, buying back shares aggressively, and trading at an attractive valuation.
Not so long ago, that was exactly the case for Apple. Between March to May 2024, market sentiment on Apple was at extreme lows. It was perceived as extremely behind in AI, and worries about growth were high.
Data by YCharts
Then, like a flip of a switch, the market completely changed its views, following a WWDC Event that was all about AI, and in this case, Apple Intelligence.
Right after the event, pundits and analysts rushed to say Apple is best positioned for consumer AI, citing its unique access to personal data and trustworthiness among its customers. Firms like Wedbush and others have gone out predicting a 'Super-Cycle', expecting Apple to sell over 240 million iPhones in FY25.
Six months later, we already know that this is not going to happen. Apple Intelligence has reportedly failed to drive higher sales, and how could it? Surveys showed most users have turned off the Apple Intelligence notification summaries, and other tools are simply not providing value.
Frankly, as someone who owns an iPhone 16 and has used Apple Intelligence features exactly zero times since initially trying them, I find it hard to believe that any analyst who actually tried it will maintain their bullish view.
The more stubborn bulls are now pushing their super-cycle predictions ahead to next year, and Apple itself is making internal changes in hopes for improvement.
Valuation & Outlook
Revisiting the first paragraph of the previous section, it's important to understand the nuance here. I am not predicting the end of Apple, nor do I believe it will lose its dominant position any time soon.
All I'm saying is that if your core products are at a very mature stage, and your attempts at launching new growth-accelerating initiatives like Apple Intelligence are failing, you should expect a discount.
However, with Apple at $222 a share, this is far from being the case:
Data by YCharts
Apple is trading at 30 times forward earnings, which are based on consensus estimates that still bake in revenue growth accelerating to 6.0% in FY25, and 8.0% in FY26.
Those estimates embed the "super-cycle" dream that I don't see coming true. It's true that Apple is theoretically well-positioned to become the personal AI assistant.
However, the way I see it, Apple has a poor track record in developing differentiated services. Its management hasn't really shown a willingness to take risks and aggressively increase investments. And, Apple's partnership with OpenAI and ChatGPT (which, by the way, works much better through the app than in the Apple integration), tells me that they won't capitalize on their supposable better position.
As such, I'm looking at a company that is set up to miss estimates, trading at a high valuation, which is disconnected from its growth prospects. This has all the makings of a 'Sell'.
Conclusion
Apple maintains a dominant position as the best-in-class consumer electronics company, and after decades of building its unbreakable ecosystem, this position allows Apple to constantly improve efficiencies, do buybacks, and increase profits.
However, it's hard to get enthusiastic about Apple's growth prospects, given its high penetration and several failures with recent products like Apple Intelligence, Vision Pro, and Apple TV+.
This means Apple is the embodiment of a Peter Lynch 'Slow-Grower' and its current valuation is far from reflecting that.
With consensus estimates still too high, I reiterate Apple at a 'Sell'.
