How Apple Gets To A $5 Trillion Valuation

Apple stock (NASDAQ: AAPL) has fared reasonably well this year, rising approximately 23% since January. With a current market cap of $3.5 trillion, Apple retains its title as the world’s most valuable company, just edging out Nvidia. This marks a significant jump from its valuation of under $1.5 trillion in early 2020.  However, Apple’s stock performance has been far from consistent over the past three years, with returns of 35% in 2021, -27% in 2022, and 49% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Looking ahead, is a $5 trillion valuation within Apple’s reach? There are some concerns for Apple stock at this juncture.  The iPhone, Apple’s flagship product, appears to have peaked in 2022, and early reception to its next big innovation, the Apple Vision Pro, has been lackluster. Apple’s valuation is also not exactly cheap, with the stock trading at 34x estimated FY’24 earnings and 39.5x trailing earnings. Yet, despite these headwinds, it’s still possible. Apple’s ecosystem strength and potential growth from services and AI could pave the way for further gains.

Services, Apple Intelligence Can Drive Revenue Growth

Apple’s revenues have risen at a reasonably healthy pace, growing at an annual rate of 12% between FY’20 and FY’23 to about $358 billion. Although Apple is likely to see sales growth cool to high single-digit levels for FY’24 to about $390 billion, there is a possibility that we could see stronger growth rates led by the services business and the generative AI trend going forward. If Apple can grow sales by about 13% over the next three years, translating into a cumulative growth of about 45%, revenues would come in at about $565 billion. There are a couple of trends that could help accelerate revenue growth in the coming years.

While early sales of Apple’s latest iPhone 16 appear to have been tepid, the real game-changer for this upgrade cycle lies in the upcoming Apple Intelligence software updates. These features, which include enhancements to Siri, new writing assistance tools, and AI-powered image generation, are expected to roll out gradually over the next few quarters. Many customers may be holding off on buying until these features are fully available, potentially driving an uptick in sales later in the cycle. The Apple intelligence features could eventually drive an upgrade cycle.

Although primarily a software update, these AI capabilities will be exclusive to the iPhone 16 and 16 Pro models. The only exception is last year’s iPhone 15 Pro, which will also receive the update. This limited backward compatibility is likely to create an incentive for users of older iPhones to consider upgrading.  Another factor that could work in Apple’s favor is the improvement in U.S. wireless carrier deals for the iPhone 16 Pro. Trade-in credits for the Pro models are higher compared to last year, which could drive more customers toward these premium devices.  We could see a similar impact with other products such as the iPad and Mac computers as well.

Apple’s Services business should also be a major growth driver for the company. Driven by strong app sales and a growing number of paid subscriptions – exceeding 1 billion in 2023—this segment benefits from more than 2 billion active customer devices. Key partnerships, such as the Google search deal, also support growth. With a large portion of these revenues being recurring, this segment offers steady growth potential. Services sales reached $85 billion in FY’24 and are projected to grow to $97 billion this year, making it Apple’s fastest-growing segment.  New AI-powered tools could also open up new avenues for growth for Apple’s services business. See our breakdown of Apple’s services business revenues.

Favorable Revenue Mix Can Expand Margins

Apple’s net margins have been on a steadily expanding trajectory, rising from levels of about 21% in FY’20 to levels of about 26% currently. We believe that margins could scale up to over 31% levels in the next three years. While growth is driven in part by more premium device sales, Apple is also benefiting from a rising mix of service revenues. Services have considerably higher gross margins (about 74% year-to-date, compared to about 38% for hardware).

The mix of services revenues is also rising, given that services are Apple’s fastest-growing business. Services account for close to 25% of Apple’s revenue presently, up from about 19% in 2020. Apple has also been historically very disciplined with its cost management and this could also help drive margins further.  Combining 45% revenue growth in the next three years, with a 400 basis point margin expansion (up 15%) would translate into earnings growth of about 67% or about 1.7x.

Now, if earnings grow 1.7x, the PE multiple will shrink by 1.7x from about 34x levels in FY’24 to about 20x, assuming the stock price stays the same. But that’s exactly what Apple investors are betting will not happen. If earnings expand 1.7x over the next few years, instead of the PE shrinking to about 20x, a scenario where the PE metric stays at about 28x looks quite likely (a 20% decline from FY’24 multiple), as the stronger growth and expanding margins give investors more confidence about Apple’s future. 

Apple’s solid balance sheet and services business cash cow should also help the stock maintain a premium valuation even in an uncertain market. This would make the growth of Apple’s market cap to levels of about $5 trillion in the next few years a real possibility. What about the time horizon for this high-return scenario? While our above example illustrates a three-year time frame, in practice, it won’t make much difference whether it takes three years or four, as long as Apple is on this revenue expansion trajectory, with margins holding up, the stock price and market cap could respond similarly.  

While investors have their fingers crossed for a soft landing by the U.S. economy following rate cuts, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 10/16/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates