Can the smartphone giant come out of its slump and deliver strong returns to investors over the next five years?
Apple (AAPL 0.50%) stock has delivered impressive gains to investors over the past five years, with shares of the tech giant rising close to 250% during this period and outpacing the S&P 500 index's gains of 77% by a big margin. The "Magnificent Seven" stock's robust rally can be attributed to the growing prominence of its high-margin services business, as well as a tremendous smartphone upgrade cycle triggered by the arrival of 5G smartphones.
However, Apple stock has lost its luster in 2024. It is down nearly 5%, and has underperformed the S&P 500 so far.
Berkshire Hathaway, led by celebrated investor Warren Buffett, has reduced its Apple stake by 13%. Moreover, analysts and investors are concerned that Apple has been late to capitalize on hot tech trends such as artificial intelligence (AI). Rivals such as Samsung are using AI to boost smartphone sales, while Apple's latest results indicate that the demand for iPhones is waning.
However, a closer look at Apple's potential catalysts indicates that the tech giant could turn out to be a solid investment over the next five years as well.
Multiple growth drivers could get Apple out of its rut
Apple released fiscal 2024 second-quarter results (for the three months ended March 30, 2024) on May 2, and shares of the company popped nearly 6%. The jump in Apple's stock price was driven by the company's better-than-expected numbers. It earned $1.53 per share on revenue of $90.8 billion, while analysts were expecting $1.51 per share on earnings on $90.5 billion in revenue.
And this was not the only reason why investors cheered Apple's report. The company increased its quarterly dividend by 4% to $0.25 per share. Additionally, Apple announced a share repurchase authorization worth a whopping $110 billion, the largest in U.S. history. Moreover, positive management commentary about the company's prospects and CEO Tim Cook's comments that Apple is investing in generative AI seem to have bolstered investor sentiment further.
More specifically, Cook pointed out on the latest earnings conference call that the company is "making significant investments, and we're looking forward to sharing some very exciting things with our customers soon." These developments are probably the reason why investors overlooked the year-over-year decline in Apple's revenue and earnings last quarter.
The company's top line was down 4% year over year, while the bottom line fell by a penny. Apple's revenue from its largest product line, the iPhone, fell to $46 billion from $51.3 billion in the year-ago period. If Apple is indeed investing significantly in generative AI, it wouldn't be surprising to see the company equip its next-generation iPhones with AI-focused features.
That's much needed right now considering that Apple's rival Samsung is already reaping the benefits of offering AI-specific features on its latest Galaxy flagship phones. The South Korean giant points out that half of the customers purchasing the Galaxy S24 smartphone family were doing so because of the integrated AI functions. More importantly, 60% of the people buying the S24 devices have been regularly using the AI functions on offer.
Not surprisingly, AI is expected to become the next big growth driver for the smartphone industry. According to Counterpoint Research, shipments of generative AI-capable smartphones could grow four times over between 2024 and 2027, with cumulative shipments crossing one billion units by 2027. More importantly, Counterpoint is expecting Apple to enter the generative AI smartphone market in 2024 and become the leading smartphone OEM (original equipment manufacturer) in this space from 2025.
Apple's track record indicates that it could indeed become the leading player in AI smartphones despite being late. Samsung, for instance, launched 5G smartphones in 2019. Apple was a year late -- the iPhone 12, launched in 2020, was its first 5G device. Even then, Apple quickly climbed the charts and started dominating the 5G smartphone market in a short time.
AppleInsider points out that Apple reportedly has a large language model (LLM) that will allow it to deploy multiple AI-focused features into its next iPhone, ranging from text summarization in apps such as Siri, Safari, and Messages to generating responses to users' queries akin to a chatbot. These features should help encourage Apple's user base to upgrade to its upcoming iPhones and also allow the company to make a dent in the fast-growing AI smartphone space.
As such, don't be surprised to see the iPhone return to growth thanks to the AI revolution, which probably explains why analysts are expecting an uptick in its bottom-line growth.
Stronger earnings growth could lead to impressive stock price gains
Apple's earnings remained nearly flat in fiscal 2023 (which ended in September 2023) at $6.13 per share. As the following chart indicates, the tech giant's earnings growth is expected to gain momentum in the current fiscal year and get stronger over the next couple of years.
AAPL EPS Estimates for Current Fiscal Year data by YCharts
Analysts are expecting Apple to sustain double-digit earnings growth of 11% for the next five years. Based on its fiscal 2023 earnings of $6.13 per share, its bottom line could jump to $10.33 per share in five years. Apple has a five-year average forward earnings multiple of 28, which is a small discount to the tech-laden Nasdaq-100 index's earnings multiple of 29.5.
Assuming it continues to trade at 28 times earnings in five years and achieves $10.33 in earnings at the end of the forecast period, its stock price could jump to $289. That would be a 57% increase from current levels. Considering that Apple is now trading at 28 times trailing earnings, it can be bought at a discount to the Nasdaq-100 (using the index as a proxy for tech stocks).
So investors looking to add a dividend-paying tech stock to their portfolios would do well to buy Apple right away, as it seems set to deliver healthy gains over the next five years.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
