Will Apple become a $3 trillion stock by 2025?

apple (AAPL 1.02%) Last June, it became the world’s first $3 trillion company. By December 14, 2023, the company’s stock price reached an all-time high of $197.86, and its market capitalization rose to $3.08 trillion, seemingly securing its position as the world’s most valuable company. Ta.

But Apple stock is now trading at about $170 per share, giving it a market capitalization of $2.63 trillion. microsoftsurpassed its market cap in January of this year and is now worth $2.99 ​​trillion. Let’s take a look at why Apple has lost its luster over the past three months, if it can regain its footing this year, and if it can become a $3 trillion stock again by 2025.

Image source: Apple.

Why has Apple lost its luster?

Bulls abandoned Apple this year for four simple reasons. First, iPhone sales, which accounted for 58% of sales in the latest quarter, are slowing. The company’s iPhone sales fell 2% in fiscal 2023 (ending last September), and grew only 6% year over year in the first quarter of fiscal 2024, when the 5G upgrade cycle ended.

Competition and macro headwinds in China further exacerbated the slowdown. According to Counterpoint Research, Apple’s iPhone sales in China fell 24% year-on-year in the first six weeks of 2024 due to intense competition from Huawei.

Second, Apple was unable to offset that slowdown by selling other products. The company’s Mac sales fell 27% in fiscal 2023 due to the broader PC market slowdown, but rose less than 1% in the first quarter of 2024. iPad sales were weak in both periods, and sales of the Apple Watch were temporarily suspended in December of last year. Partly due to patent disputes, the Vision Pro remains an expensive niche gadget for tech enthusiasts. The company also recently abandoned a decade-long plan to make electric cars. As a result, analysts expect Apple’s sales and profits to increase by only 1% and 7%, respectively, this year.

Third, the flight to safe-haven stocks sent Apple’s valuation soaring as rising interest rates and other macro headwinds roiled markets. Even after the year-to-date stock price drop, Apple’s stock price is still not cheap at 26x forward earnings, and its modest forward dividend yield of 0.6% probably won’t limit the stock’s downside.

Finally, the European Commission recently fined Apple €1.8 billion ($1.95 billion) for banning streaming music rivals such as: Spotify Technology You can’t notify users of cheaper payment options outside of the App Store. Apple could easily pay that fine, but it also faces a broader crackdown on its entire services sector, which serves more than 1 billion paid members and is often cited as a catalyst for long-term growth. It could open the door.

Will Apple lose its premium rating?

Apple’s short-term future is uncertain. At a shareholder meeting in late February, CEO Tim Cook claimed that Apple would “break new ground” in generative artificial intelligence (AI) this year, a statement he had previously promoted. It sounded like an 11th-hour attempt to jump on the AI ​​bandwagon. Microsoft’s stock price reaches an all-time high. Apple reportedly plans to add new generative AI features to Siri and Spotlight, its unified search tool for iOS, but these upgrades could meaningfully widen Microsoft’s moat for his Copilot. It is unknown whether alphabetGoogle Assistant.

If Apple’s AI plans fail to meaningfully boost sales in the coming quarters, the company’s stock could lose its premium valuation and be revalued relative to its near-term growth potential. Analysts expect earnings per share (EPS) to grow at a CAGR of 8% from FY2023 to FY2026, while sales will only grow at a compound annual growth rate (CAGR) of 4%. .

For reference, IBM The company is growing again with the expansion of its hybrid cloud and AI businesses, and its revenue and EPS are expected to grow at a CAGR of 4% and 6%, respectively, from 2023 to 2026. Based on these estimates, IBM’s stock price is just 22 times this year’s earnings. It also pays a much higher forward yield of 3.4%.

If Apple were also revalued at 22 times the forward P/E ratio, the company’s stock price would fall another 15% to the mid-$140 range, reducing its market capitalization to $2.2 trillion. So unless Apple can pull a few rabbits out of its hat, it probably won’t be able to impress the bulls and regain its $3 trillion valuation by early 2025. But in the long run, Apple may still make moves when announcing new products. Products and Services — So it’s still too early to write it off as a mature tech giant with no room to grow.