Apple Stock Has a Growth Problem. Is It Really Worth Its Premium Valuation?

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.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

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.

Should you invest $1,000 in Apple right now?

Before you buy stock in Apple, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Apple wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $721,394!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of March 18, 2025

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.