Apple (NASDAQ: AAPL) just reported financial results for its fiscal 2024 third quarter (ended June 29), and the market didn't seem enthusiastic about it. Shares were up less than 1% the day immediately following the announcement.
As of this writing, this "Magnificent Seven" enterprise is the world's most valuable, with a jaw-dropping market cap approaching $3.2 trillion, even after a sizable pullback on Monday. There might be no company that's as closely watched as this one.
But if you think you know Apple, think again. Here's one little-known fact you can't overlook.
Apple's shift to services
Over the past decade, it's been hard to ignore the rise of Apple's services. In Q3, the segment generated $24.2 billion in revenue, up 14% year over year, which represented 28% of the company's total. Ten years ago, in the fiscal 2014 third quarter, Apple raked in just $4.5 billion from services, so the growth has been notable. During the same stretch, hardware revenue almost doubled.
This is something most investors might not be too familiar with. But it's important to know in order to better understand the business and the direction it's heading in.
Apple's services, which include advertising, AppleCare, iCloud, App Store, Fitness+, Arcade, Music, News+, TV+, Card, and Pay, is precisely what helps to create the company's powerful ecosystem. This keeps users essentially locked in, making it difficult for them to leave. What's more, this provides Apple with a recurring and very profitable revenue source, as services carry a stellar gross margin of 74%.
The services segment probably never had a spotlight shining on it brighter than it is right now. That's because of the company's artificial intelligence (AI) push, known as Apple Intelligence. The primary objective is to make Apple's devices an even more crucial part of users' daily lives.
To be clear, though, Apple remains a hardware company at its core. This was true 20 years ago. And it's still true today. In the latest fiscal quarter, 72% of Apple's revenue came from the sale of hardware devices, with the vast majority coming from the iPhone. "Our installed base of active devices reached an all-time high across all products and geographic segments," said CFO Luca Maestri on the Q3 2024 earnings call.
Is it too late to buy Apple stock?
Now that investors are more familiar with a rising revenue source for Apple, the next question to consider is whether or not the stock is worthy of being an addition to your portfolio. In order to figure out if it is, we must consider two critical factors: valuation and growth.
As of this writing, shares trade at a price-to-earnings (P/E) ratio of around 32. This steep valuation represents a sizable premium of about 50% compared to the trailing-10-year average multiple. This probably is a surprise to no one, considering that the stock has skyrocketed roughly 800% since August 2014, significantly outpacing the broader Nasdaq Composite index.
On the one hand, paying a high valuation might make sense. This is a competitively advantaged business with strong profitability and unrivaled customer loyalty. I don't disagree with these factors.
But I don't see enough growth potential to justify paying a P/E ratio of between 30 and 35. Apple is only projected to grow its earnings per share at an annualized pace of 10.9% between fiscal 2023 and fiscal 2026, which isn't anything to write home about.
The hope from executives and Apple bulls is that the launch of Apple Intelligence will ignite what's known as an upgrade supercycle for the upcoming iPhone 16 model lineup. I'm not so convinced. Even if the newest iPhones deliver better-than-expected revenue, Apple stock still looks extremely expensive.
Therefore, it's best to keep shares on the watch list for now.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
