Apple Needs New Growth to Justify Its Soaring
Stock. It Won’t Be Easy.
Apple trades near record highs, with a market value no other company has ever attained. Now it has to justify the gains.
By Eric J. Savitz
Apple shares have had a historic year.
The stock has rallied more than 50% in 2023 and recently closed at a record high.
In terms of wealth creation, it has been the single best year for any company ever—Apple’s market value grew by $1 trillion.
But the unprecedented rally comes amid one of the company’s most disappointing stretches.
In each of the past four quarters, Apple’s sales have declined from the prior year.
The slide is likely to continue in the current December quarter.
Apple’s most important hardware products—the iPhone, the Mac, and the iPad—still generate huge sales, but their growth is all but gone.
Meanwhile, Apple hasn’t had a hit new product since its AirPods, the pioneering wireless earbuds, launched in 2016.
The backdrop makes the coming launch of the Apple Vision Pro, the company’s mixed-reality headset, all the more important.
But success is far from certain: The promise of virtual and augmented reality has lured many entrants, including Meta Platforms and Microsoft, but there are few success stories.
This is the Apple paradox: The company’s stock trades near record highs, with a market value no other company has ever attained.
But its growth is gone—sales fell 3% in the latest fiscal year, and they’re forecast to be up less than 4% in the current fiscal year, which ends next September—and there’s no clear plan for getting it restarted.
It’s possible that Apple could stick to its current script and still find a way back to top-line growth.
It requires some optimistic assumptions about the upgrade rate for iPhones, an ever-rising sales price for its devices, and continued low-double-digit growth for its portfolio of services, including the App Store, Apple Music, and iCloud.
But Apple’s legacy is innovation, not incremental feature creep.
Apple fans—and its shareholders—have been trained to expect products that are insanely great, that think different, or that “put a dent in the universe,” as co-founder Steve Jobs once said.
Denting the universe is hard, especially while preserving the strength of its current lineup.
For the September 2024 fiscal year, Wall Street analysts expect Apple to generate $100 billion in net income on $397 billion in sales.
It all starts with the iPhone.
Now 16 years old, the iPhone generated $200 billion in revenue in the September 2023 fiscal year—roughly the size of Microsoft’s entire revenue base.
On its own, the iPhone business would rank among the 15 largest U.S. companies.
But iPhone sales declined 2% in the September 2023 fiscal year—and recent hardware updates have been modest.
The smartphone market is now mature.
IDG sees global smartphone sales growing just 1.4% a year through 2027.
The iPhone also faces intensifying competition in China—Apple’s most important non-U.S. market—from Huawei Technologies and other local upstarts.
The growthiest part of the business is Apple’s services portfolio, which had fiscal 2023 revenue of $85 billion, up 9%.
Were it an independent company, Apple’s services arm would rank in the top 50 of the Fortune 500.
There’s a lot in that bucket—advertising, music, photos, financial services, podcasts, games, Apple Pay, Apple Care, and search revenue from Google, among other things.
As the company has added to the mix, the company has raised prices and grown revenue.
But ultimately the best way to grow services is to sell more iPhones, iPads, and Macs, since most of those services are consumed on Apple devices.
Then there’s the catchall “Wearables, Home and Accessories” segment, which includes AirPods, Apple Watch, and HomePods.
Revenue was down 3% in the latest year to $40 billion, about equal to Best Buy’s annual sales.
A current pause in watch sales due to a patent dispute won’t help results in that unit.
As with the services business, Apple’s hardware products largely play off the vast installed base of iPhones and other devices—there aren’t a lot of Android phone owners with an Apple Watch.
In 2024, Apple will add to the wearables collection with the debut of its Vision Pro headset, scheduled to launch in early 2024 at the gaudy price of $3,499.
Near-term expectations are modest.
Apple’s roots are in computing—the Mac turns 40 in January.
(Remember the 1984 Super Bowl ad?)
It isn’t the happiest of anniversaries—Macs had a rotten fiscal 2023, with revenue down 27% to $29 billion.
The iPad—now 14 years old—is almost the same size as the Mac, with fiscal 2023 sales of $28 billion, down 3%.
It’s worth noting that Wall Street seems generally unconcerned with Apple’s lack of growth.
At least for now. Of the 47 Apple sell-side analysts tracked by FactSet, just three rate the stock a Sell or its equivalent.
At a recent close of $195, Apple fetches a forward price/earnings multiple of 30, up from 20 at the start of the year.
The shares trade at a 50% premium to the S&P 500, versus 20% at the start of the year.
Apple has a higher P/E than Microsoft, Alphabet, and Meta, all of which are growing faster.
Nvidia is also cheaper, even after tripling this year.
Nvidia earnings are forecast to be up 70% in the current year, versus 7% for Apple.
Apple’s modest earnings-per-share growth is helped by its aggressive stock buybacks.
The company still has about $51 billion in net cash.
It has promised to eventually bring that cash pile to zero, meaning the ample repurchases should slow.
It’s all the more reason Apple needs its next new thing.
Apple, which declined an interview request for this story, is famously secretive about its future plans.
In that light, we’ve decided to assess potential ways Apple can recapture its glory days:
The Status Quo
A pickup in consumer spending and an acceleration in the iPhone replacement cycle is the most straightforward way to for Apple to boost growth.
These days, U.S. Apple consumers are holding on to iPhones for a little under three years, according to Statista.
Counting on recharged iPhone demand is the least-satisfying growth option, but perhaps the most likely one.
It’s the case Wedbush analyst Dan Ives recently laid out in reiterating his Outperform rating on Apple stock.
Ives has contended that Apple will be the first company to reach a $4 trillion value, sometime in 2024.
At the heart of his call is reinvigorated iPhone growth.
“Apple is in a Rock of Gibraltar–like strong position heading into 2024,” Ives wrote.
He argues that Apple’s fiscal 2024 revenue can reach $400 billion, up 4.5%, with fiscal 2025 revenue of $422 billion, up another 5.5%.
Walter Piecyk is skeptical.
An analyst and co-founder of Lightshed Partners, he made a prescient call on Apple’s sluggish fundamentals in March.
That turned out to be a miss on the stock—he set a price target of $120.
As Piecyk points out, Apple’s recent rally comes despite lackluster results and soft guidance.
“How many times are we going to hear that next year should be a supercycle for iPhone demand?” he asks, adding that there are no signs of outsize demand coming from the supply chain. His conclusion is that “people aren’t doing the math.”
Go Shopping
One of Wall Street’s favorite pastimes is dreaming up acquisition targets for Apple, given the company’s massive cash position and its strong credit rating.
But the dream of Apple buying its way to growth has been repeatedly dashed.
Over the years, Apple has been the subject of countless deal rumors, and they never come to pass, aside from the company’s $3 billion purchase of Beats in 2014.
(Apple still makes Beats headphones, although it rarely talks about the business.)
Walt Disney shareholders might like Apple to buy the struggling entertainment giant.
But Apple and CEO Tim Cook have no need for a business that includes theme parks, cruise ships, and a crumbling cable business, all with an enterprise value of $200 billion.
Wedbush’s Ives has floated the notion that Apple could bulk up its Apple TV+ streaming service with a bid for Disney’s ESPN unit, but that’s sure to be a nonstarter with Apple shareholders.
ESPN faces soaring costs for sports rights and declining revenue from cable subscribers.
Years ago, there were rumors that Apple might buy Tesla.
The ship has sailed on that one, given the auto maker’s $760 billion market value—and there’s little reason to think Apple would buy another electric-vehicle or self-driving car company.
At a much smaller scale, Apple is sometimes tossed out as a potential rescuer for Peloton Interactive, the struggling stationary-bike company, but that business is too small to materially affect Apple’s revenue growth.
Morgan Stanley analyst Erik Woodring agrees a big acquisition would be out of character.
“Apple wants to build rather than buy,” he says.
“I don’t think that happens.”
Apple’s excess cash will likely continue going to the same place: Since promising in 2018 to become “net cash neutral over time,” Apple has aggressively repurchased stock, reducing its share count by nearly 25%.
Its net cash position has gone from $163 billion to a current $51 billion.
Virtual Dreams
Even among the bulls, there’s skepticism that the Vision Pro is Apple’s next great product, at least not at a $3,499 price.
Bulls see the launch as a public beta test, with more-affordable versions of the Vision Pro still to come.
At that point, they get more excited.
A bullish view of the Vision Pro is built on the idea that Apple can eventually figure out a way to bring the price more in line with its high-end iPhone—closer to $1,000—while addressing some of the issues that reviewers have had with prototypes of the device, particularly its bulk and comfort level.
Gene Munster, founder of Deepwater Asset Management and a former Apple sell-side analyst, predicts Vision Pro could be a $40 billion business by 2030, which would make it larger than the current Mac or iPad business; Morgan Stanley’s Woodring sees 2030 revenue in the “spatial computing” category of $20 billion to $70 billion.
“I think by 2030 it can be as big as the Mac,” Munster says.
What’s clear is that Vision Pro isn’t likely to cure what ails Apple in fiscal 2024.
Or 2025.
Or even 2026.
But Apple isn’t the only player in the mixed-reality field.
Facebook founder and CEO Mark Zuckerberg was so charmed by the promise of artificial reality and the metaverse that he renamed his company Meta Platforms.
The company is now losing more than $10 billion a year on its Reality Labs business, which includes Quest headsets and its Horizon virtual world.
That’s not the kind of growth Apple needs.
Where Are the Cars?
Remember the buzz about Apple cars?
Not all that long ago, a steady stream of headlines speculated about potential manufacturing partners for an Apple self-driving car.
In 2015, The Wall Street Journal reported that Apple had targeted shipping an EV by 2019.
A 2021 Journal story said Hyundai Motor was looking for a site in Georgia to build a new plant to make Apple cars.
Neither materialized.
“The technology is simply not there yet,” says UBS analyst David Vogt.
This month, Tesla recalled more than two million cars over issues with its Autopilot feature.
Meanwhile, the appeal of an Apple car has been meaningfully reduced, as auto makers see slowing sales growth for EVs.
Deepwater’s Munster puts the odds of Apple building a car at 1 in 4.
Morgan Stanley’s Woodring is unpersuaded that Apple would enter the automotive market, which he notes is hypercompetitive, with dozens of EV manufacturers in China alone.
“I’m not sure what the point of differentiation really is,” he says.
The best argument for an Apple Car is that it’s one of the few product categories that could move the needle on Apple sales.
Next year, Tesla is expected to report sales of $120 billion.
That’s still less than iPhone sales, but it would represent a 30% boost to Apple’s revenue.
Even without building a car, Apple has taken a major role in automotive cockpits thanks to its CarPlay software, which allows consumers to control entertainment and navigation systems through the iPhone.
Apple has bigger ambitions for CarPlay.
At the company’s 2022 developers conference, it showed a new version of the software that would give Apple control over the entire cockpit display, from the speedometer to climate control.
But there has been little follow-up since.
AI and Search
Apple’s most underappreciated growth potential could be in Search and AI.
On the search front, the company’s current strategy is a lucrative one.
It’s raking in billions in revenue from Alphabet, at effectively no cost, in return for making Google the default search option on iPhones and in Safari.
That relationship is the focus of a current Justice Department lawsuit against Google.
Formal arguments have been completed, but the judge isn’t expected to rule on the case until late 2024. Appeals are likely to drag on for years after that.
A Google loss—and the end of those payments—could chop Apple profits by as much as 18%, according to Woodring.
That sounds like the nuclear option, but even the potential of losing that revenue could have Apple considering other options in search.
There’s not much to buy—other than a few small search engines like DuckDuckGo—and there’s a chance Apple could switch partners and engage with Microsoft Bing.
But Google’s ongoing regulatory issues could be an opening for Apple to start its own search engine.
The downside is that Apple’s focus on customer privacy might clash with search’s current business model, targeted advertising.
As for AI, Apple’s aging personal assistant known as Siri could benefit from an infusion of generative AI features, with the potential to widen the range of tasks that Siri can handle beyond setting alarms and sending hands-free texts.
Morgan Stanley’s Woodring thinks the emergence of generative AI models running on phones and PCs could be a boon for iPhone and Mac sales, just by making the devices more useful and relevant to consumers.
Apple already uses machine learning and AI software across multiple products.
It has been including a “neural engine” in iPhone and Mac processors since 2017 for facial recognition, fingerprint reading, and other applications.
So far, though, Apple has been mum on AI chatbots and large-language models, even as the rest of tech has gone all in.
“In terms of generative AI, obviously, we have work going on,” Cook said on the company’s November earnings call.
“I’m not going to get into details about what it is, because, as you know, we really don’t do that, but you can bet that we’re investing.
We’re investing quite a bit.”
Something Else
There are other possibilities.
Lightshed’s Piecyk sees the potential for Apple to move its iPhone business to a subscription model, with a whole range of bundled services.
Or maybe Apple can figure out a way to make a more substantial dent in the health and wellness market.
Woodring thinks Apple could add enough features to the Watch—like noninvasive glucose monitoring—to make it a reimbursable medical device.
“They have to come up with a great new product, and it can’t be a $3,500 set of goggles,” says Walt Mossberg, the longtime Wall Street Journal tech columnist, who often spoke with Steve Jobs.
He doesn’t think a car is the answer, either.
“They have to think different,” Mossberg says.
“That was the guiding principle in the second Jobs era.”
Mossberg thinks Apple could decide to take on Samsung Electronics in foldable phones, or create a version with a rollable screen.
“Their heritage is that they’re a product company, not a services company.”
And he says Apple might even be on the right track with a core element of the Vision Pro, mixing the real and virtual worlds.
If the company can find a way to do that with a more appealing device, Mossberg says, “they just might have a world-beating product.”
Apple’s next great thing could even come out of left field and change everything, again, as the iPhone once did.
“You can’t connect the dots looking forward; you can only connect them looking backward,” Jobs said in his 2005 Stanford University commencement speech.
“So you have to trust that the dots will somehow connect in your future.
You have to trust in something—your gut, destiny, life, karma, whatever.
This approach has never let me down.”
For now, Apple investors are keeping that faith.
But it has been a long time since Steve Jobs was creating the magic at Apple.
At some point—and probably as soon as 2024—Wall Street will need to see results.
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