For many years, Apple (NASDAQ:AAPL) was just about the perfect buy-and-hold stock. Recently, however, the stock’s returns have waned significantly. AAPL is up less than five% in the last 12 months, and even longtime bull Warren Buffet spent much of last year reducing his massive Apple holdings.
Today, let’s look at some of the long-term business fundamentals of Apple to determine whether the stock is undervalued or overvalued based on its probable future prospects.
Is Apple’s Current Valuation Reasonable?
Right now, Apple trades at 30.4x earnings, 7.4x sales and 43.7x book value. Although the P/E ratio has come down quite a lot since topping out around 40 times earnings last year, it’s still fairly high by the company’s historical standards.
While Apple undoubtedly commands a premium price, it’s worth keeping in mind that extremely strong profitability justifies pricing to a large extent. Think about it this way, if Apple grows earnings 10% annually then it will be less than a decade when the PE is 15x.
On a trailing 12-month basis, Apple has delivered a net margin of 24.3% and a return on invested capital of 58.0%.
Can Apple Keep Its Growth Up?
For the rest of this decade, analysts expect Apple’s earnings to grow at a rate of about 10.7% on an annualized basis. Though still quite positive, this rate is roughly in line with the expected rate of overall corporate earnings growth among US companies for 2025. As such, Apple is likely to only keep pace with the broader market instead of outperforming it as it typically has.
Apple still has room for additional growth, especially in emerging markets. Slowing demand in China, for example, has prompted the company to focus on developing its presence in India and the Middle East.
While China is still extremely important for Apple to focus on, a more diversified push to reach new customer bases in emerging markets could also go a long way toward supporting future revenue and earnings growth.
EPS growth will also likely be boosted by Apple’s ongoing share buyback program. While Apple slightly reduced its buyback authorization for 2025, it has still approved $100 billion in repurchases for this year.
Over time, reduction of the number of outstanding shares could provide a gradual yet meaningful boost to earnings on a per-share basis.
What Headwinds Does Apple Face?
At the moment, Apple is facing a combination of both short-term and long-term concerns. The most immediate problem is the ongoing confusion around tariff policy. Not only does Apple have to contend with uncertain tariff rates on Chinese goods, but it has also become the target of special tariffs.
Last week, Donald Trump floated the idea of placing a 25% tariff on Apple products if the company doesn’t shift iPhone production to the United States. Higher device prices resulting from increased tariffs could make Apple’s premium products less attractive to consumers, especially in a climate of deteriorating consumer sentiment.
On a longer-term level, investors may be concerned about a slowing of innovation at Apple. While Apple has massively refined its existing products and created an incredible ecosystem of apps, software and services, it’s no longer delivering the kind of groundbreaking product innovation that defined it while Steve Jobs was still at the helm.
Many Apple bulls hoped that the company’s Vision Pro VR headset would break that trend, but sales of the device have been lackluster at best. Without regaining its innovative steam, Apple may lose some of the luster that has kept it at the top of the tech sector for decades.
Another indication of stagnation at Apple is the fact that the company is widely perceived to have fallen behind the curve when it comes to AI. While the company certainly has the resources at its disposal to turn this around, a persistent lack of cutting-edge AI innovation could put even flagship products like the iPhone at risk.
Recent news suggests this may be about to change with Apple launching its own LLMs that in turn will demand more compute and more capex spend.
How Strong Is Apple’s Moat?
A final question that has to be answered about Apple’s long-term prospects is whether or not it still has a strong moat.
In the US, Apple remains top of the heap when it comes to smartphone manufacturing and holds a market share of almost 58%. The next-closest competitor is Samsung, which boasts a market share of only 23%. The firm’s market share in the PC space is much smaller, but Apple still accounts for about 15% of the computers sold in the US.
Beyond just hardware, Apple has also created an entire landscape of high-margin software and service offerings that also contribute to its moat. Apple Music, for example, is one of the three largest music streaming platforms. Apple’s App Store, meanwhile, is a massive driver of revenue and income for the company.
Is Apple Overvalued or Undervalued?
Apple is about 14% undervalued according to the consensus price target of analysts who place fair value at $228 per share.
Fundamentally, Apple is still an extremely strong business with a good moat and a nearly unbeatable brand. With the iPhone still far and away the dominant mobile device in the United States and new opportunities in emerging markets, Apple still seems to be a business with solid long-term prospects.
Consumer enthusiasm for Apple products remains reasonably strong, even without the company introducing much in terms of entirely new product lines in recent years.
The problem with Apple shares at the moment is a combination of growth headwinds with a premium valuation. Between the potential effects of higher tariffs and waning innovation, Apple may well have a hard time delivering the long-term earnings growth required to justify its high valuation.
Although future earnings growth likely justify something of a premium price tag, the 30x earnings the shares currently trade will seem excessive for bears but make no mistake about it, if Apple gets into the AI race, it will once again be an extremely attractive business, and it seems more likely than not that today’s prices are a bit too high given its prospects over the next several years.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.