This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
The stock market often rewards companies it believes have strong future growth potential with premium valuations. In the case of Apple (NASDAQ: AAPL), investors have bid up shares to roughly 35 times earnings -- a level that implies big growth expectations from the Street.
But a closer look at Apple's recent performance raises questions about whether the company's growth trajectory can live up to this lofty valuation.
iPhone is a drag... for now
Apple's recent financial results don't paint the picture of the growth stock you'd expect given its high valuation. In the company's fiscal first quarter of 2025, which covered the holiday shopping season, Apple reported revenue of $124.3 billion, representing just 4% year-over-year growth. More concerning for investors should be the performance of the iPhone -- Apple's flagship product that still accounts for over 56% of total revenue. iPhone sales actually declined 8% year over year during the period.
Another concern has been Apple's sales in Greater China. They fell 11% year over year during fiscal Q1. Accounting for 15% of sales, challenges in this key market are weighing on results.
Of course, there are some things for investors to be excited about. Apple saw impressive growth in some other product segments. Mac and iPad sales, for example, jumped 16% and 15% year over year respectively. But these divisions represent a much smaller portion of Apple's overall business. Services revenue, however, represents a more meaningful portion of Apple's business -- and it is growing fast. Including subscriptions and App Store sales, services segment revenue grew by 14% to $26.3 billion. This is Apple's second-largest segment after iPhone, accounting for more than 21% of revenue.
Premium valuation in context
With this backdrop, it's hard to justify the stock's current valuation. Sure, Apple's current price-to-earnings ratio is down from around 40 at the beginning of the year. But it's still much higher than the valuation levels the company typically traded at over the last decade. During the last 10 years, shares averaged a price-to-earnings multiple in the low twenties.
This elevated multiple would typically suggest investors expect accelerated growth ahead. However, Apple's own guidance points to continued modest growth, with the company forecasting "low to mid-single digit" revenue growth for the coming quarter, according to management's guidance in the company's most recent earnings call. This disconnect between valuation and projected growth raises concerns about whether Apple's stock price has gotten ahead of its fundamental business performance.
Apple's AI wildcard
One factor that could justify Apple's premium valuation would be a successful pivot to artificial intelligence as a growth driver. The company has been rolling out its Apple Intelligence features, which it hopes will drive iPhone upgrades and strengthen its ecosystem advantage.
But there's no guarantee this thesis will play out -- and things don't seem to be going smoothly.
Apple's cautious approach to its AI rollout could cause demand for the latest iPhone models to be lower than expected. Some features were initially available only in certain markets and languages, and other key features have reportedly been delayed.
If AI fails to accelerate Apple's revenue the way investors hope, the continued success of the iPhone maker's services business will become even more important. But that's a lot of pressure for a segment only accounting for about a fifth of revenue. AI features that reignite iPhone upgrade trends would be the quickest way to faster growth.
The risk-reward proposition isn't good
While Apple remains financially strong with impressive profit margins and a loyal customer base, it's simply difficult to justify such a significant premium based on current growth trends.
Investors considering Apple stock at current levels should carefully weigh the company's ecosystem advantages, evidenced by the strength in its services segment, against the challenges it faces in its core business. While Apple has consistently surprised skeptics in the past, the combination of slowing growth and a premium valuation creates a challenging risk-reward proposition at current prices.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
