Until recently, Apple was a value stock. So cheap was the iPhone maker that even without growing, it was on autopilot to deliver double-digit returns. Now, it’s viewed as a “growth stock,” sporting a valuation approaching the likes of Facebook and Alphabet. Here’s the worm in the Apple: Driven by this sudden metamorphosis in the eyes of investors, the price Apple commands for each dollar of earnings has exploded. For years, its profits have been flatlining, so that its valuation made sense. Now, its earnings must shift to a sharp upward trajectory, and stay there for years, for investors to make money. Right now, it looks like the hill has become just too steep for Apple to remotely generate the big gains its boosters expect.

For enthusiasts, the Q3 results, unveiled after the market close on July 30, marked a new phase of much faster growth. The gains over the third quarter of 2019 were particularly impressive, and those were the numbers that got the most attention. Total revenues jumped 11% to $59.7 billion, led by an almost 14% advance in high-margin services, such as commissions on App Store sales. A slight increase in revenues from China was a welcome surprise, since CEO Tim Cook had warned that a decline was probable. Earnings-per-share of $2.58 and free cash flow of $16 billion both set quarterly records.

The report won practically universal cheers from analysts, many of whom raised their price targets. RBC’s Robert Muller lifted his 12-month forecast from $390 to $440, and Daniel Ives of Wedbush lauded the “blowout” performance and reiterated his $450 marker, 17% above the closing price of $385 on July 29. All four traders on CNBC’s popular 5 PM show “Fast Money” gave excellent reviews. A guest on the broadcast, tech investor Gene Munster of Loup Ventures, called Apple’s shares “still relatively inexpensive,” and foresees a growth rate of 10% to 15% going forward, meriting a price-to-earnings multiple on par with Facebook and Alphabet. Munster joins many Apple supporters in predicting that the introduction of its new 5G iPhone will launch a new super-cycle for expansion. Money managers and analysts deemed CFO Luca Maestri’s update on the conference call that the model’s launch will be delayed a few weeks, until sometime in October, only a minor disappointment.

On July 30, Apple shares waxed 10.5% to an all-time high of $425, adding over $175 billion in market cap, to $1.84 trillion. Apple gained the equivalent of 87% of Intel’s value in a single day.

It’s possible that if what’s expected as the “iPhone 12” proves a blockbuster, and the mega-hits keep coming, Apple could generate the huge earnings gains needed to keep its share price growing briskly. But at this heady valuation, if it doesn’t get there, folks buying its shares today are in for a rough ride. Put simply, the good Q3 results are far from strong evidence that Apple is embarking on a durable phase of much faster growth.

That’s because over longer periods, Apple has achieved only minimal yearly gains in sales and profits, casting doubt on whether it can suddenly reinvent itself as a sprinter. And that includes the last twelve months. For investors, the rub is that most of the gigantic spike in Apple’s price that started in mid-2019 wasn’t driven by a rise in profits, but by a leap in what folks and funds are paying for each dollar of those shares––in other words, an explosion in its P/E multiple that’s arguably made this one-time bargain exorbitantly expensive.

To understand how Apple went from a terrific buy to a high-priced gamble, it’s instructive to see how its earnings and share price have evolved over the past half-decade for the four-quarters ending in June. By using that timeframe, we can compare Apple’s annualized performance for the 12 month period that just ended, with how it fared for the full year, June-to-June spans from 2015 to 2019. As we’ll see, the fundamentals and the stock plodded in tandem for years, until the valuation took a moonshot.

In the year ended June of 2015, Apple posted GAAP net profits of $50.8 billion, and EPS of $8.66. At $125 a share, Apple was selling at a P/E of 14.6, and its dividend yield was 1.7%. Those metrics screamed “buy!” Why? Because Apple’s great advantage is that while its earnings historically only grow a bit faster than inflation, it returns over 100% of those profits to shareholders, mainly in the form of repurchases. So in 2015, because its P/E was so low, each dollar Apple spent on buybacks went a long way, raising EPS by 6.8 cents, or 6.8%. Add the 1.7% dividend, and assume 2% earnings growth, and your total return would be 10.5%. And that’s projecting that the P/E remained at the same modest sub-15. Adding a couple of points to that lowly multiple would send returns even higher.

A year later, in June of 2017, Apple was even cheaper. Its P/E had dropped to 11. But in the periods ended in mid-2017, 2018, and 2019, the multiples were all in the still bargain 16.4 to 16.9 range, with dividend yields of 1.6% to 1.7%, meaning that even if Apple barely grew, you’d pocket 10% yearly returns.

The seismic shift started in mid-2019. From June of last year to July 30 of 2020, Apple’s share price bolted from $198 to $425, a rise of 115%. That brings the increase from June of 2015 to 240%. What should concern investors is that EPS over those five years rose less than one-fourth as fast, by 52% from $8.66 to $13.17. Hence, the overriding driver of the almost three-and-a-half times rise in Apple’s price in the past half-decade wasn’t advancing profits, but a more than doubling of its P/E from 14.6 to its current 32.3.

In fact, total profits from mid-2015 to Q3 of this year increased only 2.1% a year, from $50.8 to $55.3 billion. Most of the improvement in EPS came from the biggest series of share buybacks in corporate history. Over our five year period, Apple spent a staggering $337 billion on repurchases. That campaign lowered its float from 5.73 billion to the current 4.35 billion shares, a drop that accounts for over 60% of the rise in EPS over that period.

For all the excitement over the new Q3 report, Apple’s total profits were actually flat over the trailing four quarters, easing a touch from $55.7 to $55.3 billion. Apple’s 12% gain in EPS came exclusively from more gigantic buybacks. Profits were a slight headwind. The increase in revenues, when measured over the longer stretch of four quarters, registered 5.8%, a lot less impressive than much-praised 11% for Q3 alone.

Apple’s outlook

Let’s examine the gains investors can expect from here versus the outlook in mid-2015, assuming that Apple’s earning follow their longstanding trend of matching inflation. At today’s 32.3 P/E, each dollar spent on buybacks returns 3.1 cents or 3.1%, less than half the 6.8% five years ago. The dividend yield has shrunk from 1.7% to .77%. Using those parameters, the total return investors can anticipate going forward is 5.9% (3.1% from repurchases, .77% from dividends, plus profit growth of 2%). You’re likely to garner returns that are 40% lower now that Apple’s priced as a “growth stock” versus its days as a value play.

You’ll only pocket that just under 6% return, however, if Apple’s multiple remains at today’s 32.3 P/E, which is 90% higher than the P/E of under 17 awarded as recently as mid-2019. Five years ago, investors braved little risk that Apple’s multiple would shrink, simply because it was so low, and harbored pretty good prospects it would rise. Indeed, that’s what happened, on steroids. Today, investors are facing a new danger: That Apple won’t nearly generate the double-digit profit growth its fans are counting on, and once that’s clear, that the P/E craters back into value territory. The falling premium would overwhelm the gains in EPS coming mostly from buybacks, and the shares would plunge.

Apple is a great company, and will remain so. And it was a great buy until a year ago. We don’t know how Apple will perform going forward, but the momentum that’s driven its share price skyward dictates what it has to do in the form of achieving far more challenging feats, for investors to make money.

In their enthusiasm, the believers have simply set the bar too high for even this champion to reward them.