Apple Is One of the Most Profitable Businesses in the World. Here's Why the Stock Is Worth $295 a Share Right Now.
Key Points
Apple's products command pricing power, which supports the company’s persistently high profit margins.
It’s not unreasonable to call the "Magnificent Seven" stock overpriced at current levels.
The bulls will argue that since this is such a high-quality business, it deserves to trade at a premium valuation multiple.
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Apple (NASDAQ: AAPL) is one of the greatest businesses we've ever seen. That's indicated by its shares soaring 1,080% in the past 10 years (as of Oct. 21) and its market capitalization of $5 trillion. It is perhaps second to none when it comes to hardware and software design, supporting its position as a powerful consumer brand with loyal customers.
The Cupertino success story is one of the most profitable companies on the face of the planet. Here's why it might be worth $295 a share right now, which represents a 14% discount to the current stock price of $344.
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Pricing power is key to Apple's profitability
During the most recent fiscal quarter (third-quarter 2026 ended June 27), the company reported $29.8 billion in net income. That's truly a massive figure. Investors must understand why Apple has built such an extremely lucrative business model.
Credit goes to constant pricing power. Apple's popular devices aren't cheap. But historically, customers have not only shown a willingness to pay up for these products, they tend to upgrade when new iterations come out.
The services segment deserves some attention, too. Last quarter, it represented 28% of the company's revenue, a share that has trended higher over time. Its gross margin of 76% is much better than the 40% that products generate.
Besides the fat margins, what's equally impressive is the durability of the profits. Unlike many of today's artificial intelligence winners, which could end up being one-hit wonders, Apple has been raking it in for a long time. A decade ago, in fiscal 2016, it reported a net margin of 21%. In recent history, this has helped the business produce significant free cash flow that flows to share buybacks and dividends.
Shares are currently overvalued
The "Magnificent Seven" stock currently trades at 35 times forward earnings estimates. That's certainly an expensive valuation. The S&P 500 index trades at a forward price-to-earnings (P/E) ratio of 19.3, giving Apple a sizable premium of 81%. Value investors might turn away from this business.
There are two sides to the story here. I think it's very easy to argue, based on the forward P/E multiple, that Apple is overvalued right now. The challenge is figuring out what the right multiple should be. Because this is such a high-quality company, maybe a forward P/E ratio of 30 is correct. This implies that the stock is worth $295 right now.
On the other hand, Apple bulls won't hesitate to say that the shares are deserving of a high price tag. This business has certainly earned the market's respect, and there's nothing that says it can't keep producing winning returns in the future.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
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