It seems like everyone loves Apple (AAPL -2.41%). Well, at least 29% of those reading this do. That is the global market share for the smartphone maker, putting it in the lead over competitors such as Samsung and Alphabet's Google. With strong marketing, quality products, and locked-in users, Apple has established itself as the premium smartphone maker around the world, which has been quite a lucrative business.
So lucrative that even the Oracle of Omaha himself, Warren Buffett, bought more than 5% of the company for Berkshire Hathaway. With the stock up 368% in the last five years, Buffett's stake is now worth over $150 billion, with shares crushing the market over the same time frame.
But the question is: What does the future of Apple stock look like? Will the smartphone leader still reign supreme in 2024?
Stagnant revenue, declining hardware sales
While the business is clearly ginormous, Apple has struggled to grow its revenue in recent quarters. For the fiscal year ending in September, its revenue actually dipped slightly from 2022 and is off 2.8% from all-time highs over the past 12 months. This led net income to fall slightly, from $100 billion in fiscal year 2022 to $97 billion this year.
The company is struggling to grow sales across each of its hardware segments. The smartphone, Mac, iPad, and wearables (watches and AirPods) segments saw sales decline in 2023.
Most important is the smartphone segment, which does more than $200 billion in annual sales. With smartphone unit volumes stagnating around the world, Apple may be finally hitting a ceiling for this massive business. It has mitigated unit declines with consistent price increases, but last year these weren't enough to get revenue moving in the positive direction.
Geopolitical risks, litigation risks
While its hardware segments are stagnating, Apple's software services segment put up solid growth in 2023, hitting $85 billion in revenue. This segment is smaller than smartphone hardware sales from a revenue perspective, but has much higher profit margins, making it a key growth driver for Apple at the moment.
The problem is, Apple's software service cash cows are currently under threat from lawsuits and regulators around the globe.
In numerous regions, Apple's practices with its App Store have come under threat. It currently takes a 30% charge on most purchases made through apps on its devices and restricts other mobile app stores from operating on its devices.
Apple accepts an estimated $20 billion payment every year from Alphabet to make Google Search the default search engine on its Safari web browser. The United States government is challenging this deal on anticompetitive grounds.
Over the next five years, Apple faces a big threat for these two profit pools that make up the majority of its services revenue. If things go poorly for the company, the last few years of fast services growth may come to an end.
From a longer-term perspective, investors may need to worry about Apple's geographical diversification, especially when it comes to China. Last year, it generated $72.5 billion in revenue from the Greater China region, and it has most of its manufacturing in the country. If the new Cold War with the United States gets worse, Apple's business and manufacturing could come under threat.
It is hard to quantify the exact magnitude of this risk, but it is a risk nonetheless that Apple investors should think strongly about.
Can the Vision Pro spur growth?
Even though Apple shares are up 52% year to date, the company has seen its financials stagnate and there are some growing risks to the business that should not be ignored.
But it isn't all bad news for the technology giant. In 2024, the hardware maker is coming out with what will hopefully be its next hit product: the Vision Pro.
Unveiled at a demo earlier this year, the Vision Pro is a pair of augmented reality glasses. The company is hoping to take the next step in computing with the devices, which feature highly advanced sensors and cameras, and plans to sell them at $3,500 a pop. Apple expects to sell 1 million units in 2024 and 10 million units over the next three years.
That could equate to $35 billion in revenue. That's not too material compared to the company's close to $400 billion in annual sales, but this could generate some momentum and be the start of Apple's next big business over the next five to 10 years.
The valuation is not attractive
Despite its dominant position in the smartphone market and the potential of the Vision Pro, Apple's stock looks unlikely to reign supreme in 2024. The key reason is its valuation.
As of this writing, Apple has a price-to-earnings ratio (P/E) of 32. That is well above the S&P 500 average of 26 for a company with declining sales that is also dealing with regulatory antitrust risk and is in the middle of geopolitical tensions.
Yes, the stock has performed remarkably over the past five, 10, and 20 years, but this doesn't have any bearing on what shares will do in the future. Typically, investors should want a discounted valuation when dealing with declining revenue and mounting risks on the horizon.
Apple stock is not likely to reign supreme in 2024. Investors should avoid buying shares at current prices.
