Funds and folks seem to be recognizing that America’s most valuable enterprise, and a stock that before the new slump rallied 50% in 2023, is seriously, dangerously overpriced. The new figures spotlight that the stalwart valued for years of rapid growth to come is—at best—flattening. The other scenario: It’s trending back toward the (still impressive) profits it posted before the pandemic.

Apple’s growth conundrum

The headlines stressed that Apple’s revenues fell 1.4% to $81.8 billion from the mark in June 2022. The culprit was equipment sales. Revenues from the iPhone registered 2% below a year ago. Better-than-expected growth in services, comprising iCloud, Music, and Apple TV+, weren’t enough to offset the softness in products. CEO Tim Cook implied that the iPhone sales that now account for half of all Apple revenues will keep declining. While citing strength in India and other emerging markets, he cautioned, “It’s a challenging smartphone market in the U.S. currently.”

Put simply, the only way for Apple to recast itself as a growth engine is to achieve growth in services so powerful that the sector’s forward march surmounts the retreat in its core franchises. But services still amount to just one-quarter of Apple’s overall revenues. The pace at which that sector must grow to justify a still nearly $3 trillion market cap, and keep it advancing, seems mathematically doubtful.

Is it worth buying Apple stock today?

From fiscal 2018 to 2020, Apple consistently posted net GAAP average earnings of $14 billion or $15 billion a quarter. But surging demand for work-from-home gear during the pandemic lifted profits to $19.4 billion in Q3 of 2022, followed by average earnings of $25 billion a quarter through March 2023. In the December quarter, the figure rose to almost $30 billion. But even though profits fell from the pinnacle in the second quarter, and seemed certain to keep tumbling, Apple’s P/E kept jumping to new highs.

At the start of 2023, its multiple stood at around 20 and trailing earnings were a formidable $100 billion, almost twice its run rate in the 2018–20 period. But by late July, its market cap had soared from roughly $2 trillion at the start of the year, to $3 trillion. And its P/E rocketed to 32. But earnings had already started declining, thus the great disconnect began.

The Aug. 3 report confirmed the downward trend. Net earnings were $19.9 billion, down 18% from the previous quarter. The remaining question is whether Apple’s earnings can possibly stabilize at that nearly $20 billion quarterly level, or around $80 billion a year, or if they’re destined to fall more. Keep in mind that $80 billion is a spectacular figure that’s already 45% above the pre-pandemic norm.

Yes, Apple stock is still really expensive

But Apple is selling at a P/E of 36. That’s much, much too expensive for a non-grower sporting a 0.5% dividend yield. Even dedicating all cash flow to buybacks, Apple’s normal playbook, would achieve EPS gains of 3% a year, plus inflation. That’s not enough. For Apple to become a good buy, even if it keeps making $80 billion a year, its price must go much lower.

But what if Apple really can’t continue making a number that seemed unimaginable before COVID struck? If services can’t outrun the decline in products fast enough, earnings will keep falling. Then the outlook for its shares gets even dimmer. It looks like investors mistook a never-before-seen windfall as a new fast track. It’s likely that Apple will keep a lot of that pandemic uplift and remain significantly more profitable than before the outbreak. But investors wanted too much, a liftoff on top of a liftoff. Indeed, as the new results showed, gravity is finally taking hold.