Hey Siri: Screen iPhone calls on Apple’s valuation

The iPhone 15 is probably coming soon, but the handset that anchors Apple is losing some of its allure. Even as the pace of new features slows, however, investors have become more excited about the company’s prospects than they were when revenue from the devices and accompanying services were both growing faster.

Apple kept delivering in the latest quarter. It said on Thursday it generated $19.9 billion of net income for the three months ending on July 1, a small uptick from a year earlier. Moreover, it is returning prodigious amounts of money to shareholders. Dividends and buybacks totaled more than $24 billion during the period.

Boss Tim Cook can keep milking the $3 trillion cash cow. The smartphone market is mature, but iPhone customers are famously loyal. There will be plenty of handsets to replace when they are lost, broken or wear out. Apple sold nearly $40 billion of them in the quarter, a 2.5% dip from roughly the same three-month stretch in 2022.

It’s possible the decline is because gearheads are holding out for the next version. In 2017, though, existing U.S. owners waited 2.1 years to replace their iPhone, according to Consumer Intelligence Research Partners. The span has steadily expanded to 2.4 years now. Blame fewer new bells and whistles, more durable screens and financing plans that encourage shoppers to buy pricier phones, but who then hang onto them for longer. At best, the market looks mature.

Moreover, while Apple is reaping more cash from selling apps, gaming subscriptions and advertising, services growth is slowing. The segment’s revenue reached a record $21 billion in the quarter, or 8% more than the same period a year ago. Five years ago, however, the division was growing more than 30% annually.

Despite these trends, Apple shares are trading at 30 times estimated earnings for the next 12 months, according to Refinitiv. Five years ago, they fetched about 15 times, implying that investors today are more optimistic and unfazed by just how big the company has become.

Back in 2018, a few years after the Apple Watch came out, the multiple was constrained by doubts about what would happen when iPhone profit growth slowed. The services division came through. Now, the stock is more expensive, which suggests great confidence in the company’s ability to sell millions of virtual- or augmented-reality goggles, or some other new gadget. Cook may have earned the benefit of the doubt, but the valuation leaves little room for error. Rueters