Is Apple really worth $3 trillion? The math suggests no.

That may be a hard conclusion to accept, on a July 4 week when business news outlets and Wall Street analysts join voices in saluting Apple’s newest coup. On Friday, June 30, Apple shares finished the trading day at a total market cap of over $3 trillion, the first time any U.S. enterprise has ever reached that milestone. The Colossus of Cupertino had hit the “Big 3” mark during intraday trading in January of 2022, only to fall short by the market close, then cratered for the remainder of last year. But in 2023, Apple’s stock has rampaged 49%, adding almost exactly $1 trillion in value, equivalent to 40% of the $2.5 trillion that Microsoft’s worth today.

Apple stock forecast

Put simply, Apple faces two major obstacles in delivering strong gains going forward. Both stem from the the trend that’s so enriched investors to this point: A giant rise in its valuation that far exceeds probably the strongest earnings takeoff in the history of capital markets. The upshot: Apple now sells at an unsustainably high multiple on top of profits that are probably unrepeatable as well. From the close of its 2015 to 2020 fiscal years (ended September 30), Apple raised its earnings-per-share by a total of 42%, or a modest 7.3% annually, to $3.28. Then, as hunger for its PCs, phones, services and other offerings that powered the work-from-home revolution exploded, its EPS staged a moonshot, climbing in to $6.15 in March of 2022, a gain 88% in just six quarters, twice the increase over the five years through September 2020.

From the end of 2009 to COVID-19 outbreak, Apple’s median price-to-earnings ratio hovered at around 16. But on June 30, the day Apple broke $3 trillion, its PE reached 32.9, meaning that shareholders are now getting less than half the dollars in profits for every $100 they pay for shares alongside the nine year norm preceding the pandemic. And the markets put that extra premium on GAAP earnings that roared from the mid-$50 billions where they’d been stuck in the mid-to-late 2010s to $100 billion in fiscal 2022. In other words, investors awarded the sumptuous PE because they expected Apple’s profits to grow rapidly even after almost doubling in a few quarters. And that’s the rub.

The two problems: Dividends and buybacks provide less bang at these prices, and the PE will probably drop

Today, Apple’s official dividend yield is a meager 0.58%. Meanwhile it’s been pumping over 90% of its GAAP profits into repurchases in the last couple of fiscal years; in fact, the total of buybacks plus dividends slightly exceeds total earnings. For this analysis, we’ll assume that Apple simply awards all of its reported profits in a combination of the two categories. The problem: At a PE of 33, returning 100% of earnings to shareholders in dividends and buybacks provides a total return of just 3%. That’s a stark contrast from the 2017 and 2018 span, when Apple’s PE averaged 16. Then, dedicating all earnings to dividends and buybacks promised a return of 6.25%, more than double today’s number (that’s Apple’s “dividends plus buybacks yield,” or the inverse of the 16 multiple).

Let’s posit that investors will want a 10% annual gains over the next decade as compensation for owning this super-high priced, and hence pretty risky, stock. If Apple’s PE stayed constant at 33, it could get there by raising profits a highly challenging 7% a year, including inflation—that’s the 3% combined dividend and buyback yield plus 7% annual advance in earnings. But the chances the multiple can remain in this rarified realm are nil. Let’s estimate a sustainable PE for Apple. One useful formula predicts that its PE will revert halfway back to the historic, pre-pandemic level of 16. The midpoint between its old 16 multiple and the current 33 is roughly 24. Keep in mind that 24 is still a formidable number that would incorporate expectations of robust earnings growth for anyone buying in 2033. So we’re taking a best case scenario.

A falling PE puts the emphasis on epic earnings growth that’s unachievable

A decline in Apple’s multiple from 33 to 24 from now until mid-2033 would require annual shrinkage of 3 percent. Every year, its PE would be 97% that of the previous year’s, finishing at 24 at the end of our window. (A multiple that’s 3% lower this year than last means the share price will fall by the same 3% if EPS stays flat.) The headwind from the 3% yearly slide in the multiple would completely offset the 3% upward push from dividends and buybacks. As a result, the entire 10% return investors expect would need to come from advancing profits.

The essential question becomes, can Apple really grow its net GAAP profits at 10% on a consistent basis, as the needed numbers become more and more gigantic? Based on the obvious math, the answer would be “not a chance.” Meeting the bogeys requires lifting profits by $10 billion in fiscal 2023, and $15 billion in 2027. The law of large numbers becomes a steep obstacle. Five years from now, Apple would need to increase its profits by the equivalent of what Procter & Gamble, the 17th largest earner on the Fortune 500 list that year, made in 2022.

In fact, Apple faces a thorny test in significantly growing its profits at all, let alone at 10% a year. Based on its last four quarters, net earnings have decreased from $100 billion in fiscal 2022 to $95 billion, leading to worries that the almost 90% surge fueled by the pandemic may be partially a one-time phenomenon. Keep in mind that Apple’s earnings in FY 2022 were already 28% and 70% higher respectively than those of the two other biggest winners from the outbreak, and the second and third highest earners on the Fortune 500 list, Microsoft and Alphabet.

The feat of reaching $3 trillion that’s led Wall Street to predict more big returns to come really bodes just the opposite. It sets the bar for what Apple must achieve well beyond even this extraordinary money spinner’s capabilities. Apple remains a great company. It’s anything but a great buy.