To The Moon

$Apple(AAPL)$ ’s relatively weak position in the AI industry, combined with concerns over market saturation and innovation risks, might leave the company vulnerable in a potentially weakening macroeconomic environment.

Moreover, it’s one of the most highly valued companies among the “Mag Seven,” yet shows no clear signs that it deserves this valuation based on future growth projections.

Four Key Factors

The iPhone remains Apple’s main growth driver, but the sales expansion expected with the iPhone 16 and iPhone 16 Plus, fueled by AI hype, hasn’t delivered as anticipated. This isn’t a good sign, but it’s mainly because the new AI features haven’t been fully activated yet. That’s probably why the much-anticipated upgrade supercycle hasn’t fully kicked off either. But this also highlights Apple’s broader innovation weakness at the moment.

Second, Apple has been struggling in the Chinese market. Over the next few years, Apple’s strength could weaken. Similar to $Tesla Motors(TSLA)$ ’s strategy with electric vehicles, Apple has been relying on discounts to maintain its market position in China, trying to counter aggressive pricing and feature-rich products from local competitors.

Third, many Chinese consumers value features like camera quality and battery life more than AI capabilities, which affects their buying decisions. The delay in rolling out AI features in Apple devices means this situation remains unchanged, though we might see a gradual shift toward Apple in the future.

Another important segment to watch in the fourth quarter is Apple’s services division, which continues to perform well, hitting record revenues. With the help of subscription services like Apple Music and Fitness+, this division is expected to maintain its growth trajectory.

Overall, the market expects Apple’s Q4 earnings per share to grow 9.4% year-over-year, higher than Q3’s 4.9%. However, this number will likely fall short of expectations. Considering this, I believe the biggest short-term risk is overvaluation due to the AI upgrade supercycle. With potential speculative valuations down the road, I think significant downward fluctuations could occur.

Possible Mid-term Correction

Apple’s three core valuation ratios (price-to-sales, price-to-earnings, and free cash flow ratios) have all risen sharply over the past three years. However, its operating income, net income, and free cash flow year-over-year growth rates have been declining. While we can expect future growth related to the AI upgrade supercycle, much of this has already been priced into the stock.

Additionally, it’s worth comparing Apple to other companies in the “Mag Seven” to assess its relative valuation.

By these metrics, Apple is clearly overvalued, and analysts consider investing in the company extremely risky, as its future growth prospects don’t look as strong as those of Tesla, another stock I view as overvalued in the group.

Based on its AI upgrade supercycle, Apple’s market cap could reach $4 trillion by 2025. However, as a long-term investor, it’s important to consider that much of this potential gain could be speculative. Given Apple’s high valuation, short-term investment based on AI momentum seems more appropriate than long-term investment, and I believe this is unsustainable.

Apple’s non-GAAP price-to-earnings ratio over the past five years has averaged 28.8. The widely expected three- to five-year forward GAAP earnings per share compound annual growth rate is 8.63%, compared to the five-year average of 11.35%. As a result, we should expect Apple’s non-GAAP price-to-earnings ratio to contract in the mid-term, from 35.5 down to around 25.

As the hype surrounding the AI upgrade supercycle fades, we could see this lower price-to-earnings ratio within three to five years. For this analysis, consider the following: if Apple achieves normalized earnings per share of $9.40 by September 2027, with a price-to-earnings ratio of 25, the stock would be priced at $235. Thus, Apple can only be considered a mid- to long-term hold.

Risks: Long-term Contraction

Despite analysts giving a “hold” rating, I believe there’s a strong case that the company could face prolonged growth rate declines in the coming decades. This primarily includes Apple’s weak position in AI and the lack of innovation in key models like AR glasses, as well as the lukewarm adoption of its Apple Vision Pro VR headset.

Apple struggles to compete in two key areas: smartphones and PCs. Its design and hardware advantages are strengthened by a robust operating system, with many users locked into its ecosystem. That said, this network effect isn’t as strong as initially thought.

With the current trend toward cloud migration, workflows are increasingly shifting from one operating system to another over the internet. As a result, Apple is weakening in this area. To address this, management could dive deeper into product customization, but that runs counter to Apple’s founding culture of closed systems and standardization.

The shrinkage of business is gradual, often showing negative growth, similar to the compound growth rate during the company’s rise. So, we might be at the peak of the AI upgrade cycle, and once it ends, the market might realize the company is overvalued, especially if we also begin to see a long-term contraction in the company’s core growth rates.

Apple is one of the world’s most important tech companies, and that won’t change. However, the business could easily shrink in the mid- to long-term. The fourth quarter may be relatively strong, with true growth in fiscal 2025 driven by Apple Intelligence, but after that, multiple valuation contractions are expected, with a compound annual growth rate of just 1.5% over the next three years.

Hence, the long-term value rating is a “hold.”