Apple stock is institutional favorite, but is it overvalued?

Key Points

• Apple stock gained 49.39% in 2023, but that performance trailed many other S&P 500 stocks.
• A decline in smartphone sales slowed the company's revenue growth.
• Institutions view the stock as reliably profitable, and a 12-year history of increasing the dividend bolsters its case as a hold or buy. 

With Apple Inc. NASDAQ: AAPL holding the No. 1 spot as the biggest S&P 500 component, and having posted a 2023 gain of 49.39% is the stock overvalued, or primed for a correction in 2024? 

Even among technology stocks tracked in the Technology Select Sector SPDR Fund NYSEARCA: XLK, Apple is only the 23rd best performer this year, with AI chip maker Nvidia Corp. NASDAQ: NVDA famously being the S&P price leader in 2023. 

But, pardon the pun, it’s not exactly an apples-to-apples comparison.

Apple is a consumer-focused tech giant, known for its diverse product ecosystem, while Nvidia specializes in graphics processing units for gaming and high-performance computing. Apple is also captive to a large consumer marketplace, with its own challenges. 

Smartphone sales stagnant in '23

For example, smartphone sales have been rising recently but declined for much of 2023. At this juncture, that hurts Apple. 

A look at the Apple chart shows the stock rallying to a new high of $197.20 in July before pulling back along with the broader SPDR S&P 500 ETF Trust NYSEARCA: SPY. The stock rallied again in November and December, and is winding down the year just shy of the $200 mark. 

Among the Magnificent 7 tech stocks that led the market in 2023, Apple has the lowest yearly return, trailing Nvidia, Meta Platforms Inc. NASDAQ: META, Tesla Inc. NASDAQ: TSLA, Amazon.com Inc. NASDAQ: AMZN, Alphabet Inc. NASDAQ: GOOGL and Microsoft Corp. NASDAQ: MSFT. 

In addition, plenty of stocks not part of that group are also better gainers than Apple.

Apple’s days of supercharged growth appear to be in the past, although that’s not at all unusual for a company that’s been publicly traded for 43 years, and whose market capitalization is $3.02 trillion.  

Where are the exciting new products?

Revenue growth slowed in the past four quarters on a combination of factors including slower smartphone replacement cycles, sluggish sales of the iPhone 15 and no exciting new products that consumers are lining up to snag. 

A glance at the Apple analyst forecasts shows a consensus view of “moderate buy,” but sometimes that broad overview masks some doubts beneath the surface.

For example, several analysts have either downgraded the stock in the past few months or are simply keeping their ratings at “sector weight,” meaning they don’t see the stock doing anything special in the foreseeable future.

It would be unusual for analysts as a whole to advise selling Apple, due to its size and its reliable track record of generating profits. In addition, Apple dividend data show the stock with a 12-year history of increasing the shareholder payout. That makes it an attractive stock for institutional owners. 

Single-digit earnings growth 

Wall Street expects Apple to earn $6.54 a share in 2024, an increase of 7%. In 2025, that’s expected to grow by 8% to $7.07 a share. Those are both significantly lower than the company’s three-year earnings growth rate of 19%. 

Apple is still trading at levels most often seen in fast-moving growth stocks; it has a price-to-earnings ratio of 32. That might seem like an extremely frothy valuation for a company whose earnings growth is dropping sharply, and whose year-over-year revenue has been declining. 

There are a few reasons why investors should consider holding the stock, rather than bailing out. 

Mad dash for the exits unlikely

First, as noted above, Apple is an institutional quality stock that big investors will undoubtedly continue holding as part of their portfolios. That means even when an inevitable downturn arrives, investors won’t be making a panicked run for the exits. 

Second, if you dig deep into the numbers, some of Apple’s revenue was hurt by foreign exchange rates in 2023. A strong dollar dented results for many tech firms, contributing to the selloffs in the late summer and early autumn.  

Finally, Apple’s services segment, which typically carries higher profit margins, has been growing fast. The services business includes warranties, licensing charges, subscriptions and Apple Pay. 

The stock may be a little overextended for some investors at this moment, but could be one to watch for its next pullback to a short-term or medium-term moving average.