Was $3 Trillion the Top on Apple Stock?

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Big numbers can be hard to wrap your mind around, especially when they appear as digits on a screen. Consumer electronics titan Apple (NASDAQ:AAPL) recently hit $3 trillion in market cap, an astonishing feat for the iPhone maker.

Apple is a company that everyone knows; more than one billion people use iPhones. It’s arguably the most dominant company on Earth. But what does the future hold for Apple investors? It’s essential to understand the magnitude of Apple’s success and the risks it now faces.

Illustrating Apple’s size

Apple’s market cap now sits at $2.8 trillion after falling slightly from its recent peak. For reference, the next highest market cap belongs to Microsoft at $2.3 trillion. There’s a cool $500 billion gap between the two. It’s hard to visualize just how massive these numbers are. For example, let’s consider the automotive industry; it’s the largest purchase most people make in their lives outside of their homes. If you add up the current market cap of the world’s 10 largest automotive companies, the result would be roughly $2 trillion. You could fit them inside Apple and have almost a trillion dollars to spare!

Consider that the United States is the largest economy in the world. Its gross domestic product (GDP), the value of all goods and services a country produces, is $20.8 trillion. Apple is a single company out of millions of businesses in the U.S., yet its size is equivalent to more than 10% of the economy. If Apple were its own country, it would rank as the fifth-largest economy globally!

Why is understanding this magnitude of size important? Because investors need to understand not where a company is, but where it’s going. It’s more than fair to question: Just how much bigger can Apple realistically get?

Image source: Getty Images

Fleshing this out in the numbers

Apple has had a stellar 2021 fiscal year, growing revenue 33% year over year to $365 billion. The year included what is called a “supercycle,” periods of high sales growth, usually due to a major iPhone release.

We can see some supercycles appear over the years, including 2012, 2015, and 2021. Apple’s first 5G phones launched at the end of 2020, and sales have been robust since. It makes sense; 5G is a new generation of wireless network technology that could be 10 times faster than 4G. A lot of people probably waited for 5G to upgrade their smartphones. Historically, the cycle eventually ends, and Apple’s revenue growth slows significantly.

AAPL Revenue (Quarterly YoY Growth) data by YCharts. YoY = year-over-year.

Apple’s price-to-earnings ratio has traditionally fluctuated between 10 to 20, but today its P/E ratio exceeds 30, a 50% premium to even the high end of this historical range. The stock could be vulnerable if growth slows in the coming quarters as it has in the past. Analysts are expecting slower growth moving forward; estimates for the next two fiscal years call for just mid-single-digit revenue growth.

Thanks mainly to Apple’s aggressive share buybacks, analysts expect 12% earnings per share growth annually over the next three to five years. Double-digit earnings growth is nice, but it’s becoming harder to see Apple as a growth stock moving forward.

What does the future hold?

Now it’s time to put all of this together. Apple’s a massive company coming out of a peak growth cycle, which could result in growth slowing down considerably moving forward. Meanwhile, the stock is trading at a significantly higher valuation than what has been “normal” in years past. I can’t predict the future; perhaps Apple will hold its share price. Maybe it even goes higher from here. However, it’s hard to see a scenario where the potential upside is higher than the potential downside.

I think it’s more likely that Apple steadily reverts to its past valuation, a P/E between 10 and 20, as revenue growth slows over the next 24 months. This isn’t to say that Apple’s not a great company, because it is. Unfortunately, being a great company doesn’t guarantee that a stock is an excellent investment. Apple is a tech blue-chip that likely isn’t going anywhere anytime soon. But if I’m looking to put new money to work in the market, there could be better places to look.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.