Is Apple still an attractive investment?
A slow growing company at a P/E of ~40, how could this play out?
After years of outperformance, Apple’s loyal followers and investors have pushed the company to record heights. Yet beneath the surface lies a slow-growing business. How could this investment play out?
In this article, we’ll take a closer look at whether Apple still deserves a place in your portfolio, and what would need to change for it to remain a solid investment. In the end, we’ll share a valuation, built on what we believe are realistic assumptions.
What kind of business is Apple?
“Devices!” you might say. After all, iPhones, MacBooks, and Apple Watches are what built Apple’s empire, and they still account for more than 73% of revenue. However, the catch is that they only account for 58% of total profits.
So what’s happening here?
Services, which include App Store commissions and iCloud revenue, have transformed Apple’s business model. The share of total revenue rose from 4% in 2010 to 19.6% in 2020 and 26% in 2025. Crucially, they now represent 42%+ of gross profits, with gross margins around 75%, making this segment Apple’s true profit engine.
💡When deducting the operating expenses by revenue share, we come to a ~20% operating margin for the devices division, and ~55% for the services division.
“Because we’re not a hardware company … there are other things we are doing and could do to have revenue and have profit flow.”
The quote above came from Tim Cook, back in early 2013. Apple's device business has always been the foundation of a well-planned ecosystem, encompassing more than just hardware. The App Store’s launch just a year after the iPhone wasn’t a coincidence, either. The idea of an ecosystem attracted Jobs from the start.
The hardware, with its elegant design, draws users in. But it’s the software and Apple’s ecosystem that keeps them coming back and locked-in.
💡Roughly 90% of Apple customers buy another Apple device when upgrading.
But… device sales are slowing. The smartphone market has grown low-single digit in the last couple of years. Roughly 60% of the world’s population already owns a smartphone (91% in the U.S., 88% in Europe, less in developing markets), leaving little room for growth. Apple sells ‘only’ about 1 in 5 smartphones worldwide, yet captures nearly 90% of the entire industry’s profits. The remainder is mostly split among Android manufacturers.
Apple’s first wave is attracting people to buy into its devices. The second wave is getting those users to spend more (upselling) within Apple’s services ecosystem.
💡Management’s remarks suggest that both App Store commission fees and iCloud revenue have grown by roughly 20% per year in recent years.
How could Apple leverage its Service division?
By now, we’ve seen that Apple’s services business has a powerful twofold effect: 1) it’s growing faster than Apple’s device revenue, and 2) it’s far more profitable.
Assuming this trend holds for the next five years, while Apple’s user base is unlikely to shrink (and may in fact grow a few percentage points a year), this will result in operating leverage: profits growing faster than revenues.
Let’s say services revenue will grow 15% in the coming five years, and 10% in the five thereafter. That will result in $353 billion of revenue by FY2035.
Let’s say its mature devices division will grow 2% a year the coming 10 years. That will result in $373 billion of revenue by FY2035.
When we apply our estimated operating margins, we can see where Apple’s profits are really coming from: Services.
So… Although Apple’s revenue isn’t likely to grow at double-digit rates in the future, its profitability may skyrocket, which has a major effect on the valuation.
Valuation
Apple Devices Valuation
Apple Services Valuation
Adding both components together, you’d end up with a market cap of roughly $6.35 trillion by FY 2035. From today’s ~$4 trillion valuation, that implies an annualized return of about 4.75%. Once you factor in dividends and buybacks, a total return in the range of 6–8% seems reasonable. It’s not an obvious bargain, but it’s also far from a disastrous proposition.
Of course, this is just one possible scenario. There are plenty of risks that could prevent it from playing out. To name one: regulation may put pressure on Apple’s lucrative App Store commission fees. We’ll see in five to ten years whether Apple truly remains a solid investment, and whether it can succeed by fully leveraging its Services division.
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The Dutch Investors
Annual total return at 6-8% below market for valuation 33% above market does not sound very attractive