This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
For more than a decade, Apple (NASDAQ: AAPL) was the largest company in the world by market capitalization. And while it still has a market cap of $3 trillion as of this writing, it has been surpassed by Microsoft and Nvidia in the last few years as cloud computing and artificial intelligence (AI) computer chips take the market by storm.
It was one of the longest reigns in market history, but Apple's status as top market cap leader has officially come to an end. Will it make a comeback and reclaim its No. 1 spot? In the next few years, at least, the answer is quite clear for investors.
Slower growth than its peers
In order to compare Apple with other trillion-dollar market cap peers, the first thing to do is look at growth. Microsoft has grown its revenue by 36% over the last three years. Nvidia has grown its revenue by over 300%. Apple? Its revenue is only up 3.3% in the last three years, not growing much at all and greatly trailing the rate of inflation. Fewer consumers are buying iPhones every year while new products like the Vision Pro flopped.
It looks like this will continue over the next few years as well. Microsoft and Nvidia are benefiting immensely from AI and its impact on demand for cloud computing and semiconductor products, where both companies are leaders. Apple has failed to capture any share of these rapidly growing sectors, which is why these other "Magnificent Seven" stocks are charging ahead of it in market capitalization. If these trends hold, the other cloud and AI players such as Amazon and Alphabet may pass Apple and send the stock further down the market cap rankings list.
Is the valuation cheaper?
Growth is not the entire picture with a stock. Investors also need to consider valuation and the current earnings multiples of Apple, Microsoft, and Nvidia. On the one hand, look at the trailing price-to-earnings (P/E) ratio and see that Apple's P/E of 31 is well below Microsoft's P/E of 35 and Nvidia's P/E of 46. This would make Apple stock cheaper in a vacuum and could help it regain some ground in the market cap race.
However, in all likelihood, these two competitors deserve to trade at higher earnings multiples than Apple because of faster growth in earnings per share (EPS). Similar to revenue, both Microsoft and Nvidia have grown EPS at a much faster pace than Apple while Apple's EPS has barely budged in the last few years. Expect this to continue over the next five years.
Apple may see its EPS fall over the next few years. Its high-margin services and software revenue is under attack from antitrust lawsuits. The App Store was ruled a monopoly and Apple is now forced to allow third-party payment processors on mobile applications. Its huge payment from Google for default search engine status is also at risk of getting nullified due to a current lawsuit against Google. Both of these developments may hurt Apple's earnings power over the next few years.
AAPL EPS Diluted (TTM) data by YCharts
Why Apple will not reclaim its status as the largest company in the world
I think it is unlikely that Apple will reclaim its throne atop the market cap leaderboard. It has minimal growth avenues to drive revenue higher while a company like Nvidia is posting 69% year-over-year revenue growth in its latest quarterly results. This dichotomy means that when it comes to market cap, Apple will fall further behind Nvidia and Microsoft in the years to come.
Apple is a risky stock to buy right now. It is growing slowly, trades at a premium P/E ratio, and has risks coming that could hurt its future profitability. Avoid buying this stock for the time being.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
