Apple Stock Is Up 22%, but 1 Slowing Business Could Test That Valuation
Key Points
Apple stock is up 22% so far in 2026, and it trades at an expensive 38 times earnings.
The services segment now contributes 40% of the company's gross profit, so its slower growth could impact Apple's earnings performance.
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Apple (NASDAQ: AAPL) stock is up about 22% this year through Nov. 3, roughly double the S&P 500's (SNPINDEX: ^GSPC) 11% gain. That run has pushed the stock to a valuation of about 38 times earnings. One reason Apple has deserved that premium is steady growth in its high-margin services business, making the recent slowdown worth a closer look.
In Apple's fiscal 2026 fourth quarter, which ended Sept. 26, services growth slowed to 10% year over year, down from about 12% the prior quarter, and management said it expects 8% to 9% in fiscal 2027 Q1, citing headwinds from third-party licensing and shifts in foreign currency exchange rates. Notably, in Apple's annual report for fiscal 2026, it did not describe the App Store as a driver of services segment growth, listing only advertising and cloud services.
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The slowing growth of the services business matters because it is Apple's profit engine. Services revenue came with a 76% gross margin last fiscal year, nearly double its 39% gross margin on products. And services accounted for 40% of Apple's gross profit.
Earnings grew 13.5% year over year in fiscal Q4, but analysts are modeling for annual growth of less than 11% over the long term. If growth in services continues to weaken, investors may re-rate the stock to a lower earnings multiple, which could limit its upside potential.
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The rest of Apple's business looks strong. Revenue rose 15% in fiscal 2026 to a record $479 billion as iPhone sales grew 17% last quarter and Mac sales jumped 24%. Apple expects the current holiday quarter to be "the best quarter for revenue in the history of the company," as it will be the first full quarter of sales for the iPhone Duo, Apple's first foldable smartphone.
With the stock trading at about 38 times earnings, investors are paying for a lot of anticipated growth. The one thing to watch is whether the next quarter's services growth lands within or above the 8% to 9% forecast range. If it falls short, the stock's current premium valuation could become harder to justify.
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John Ballard 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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