Apple (NASDAQ:AAPL) stock notched another 30% gain this month after announcing a 4-for-1 stock split in late July. The $2.2 trillion behemoth has continued to pump out strong financial results amidst the coronavirus pandemic. But as shares continue to rise, Apple shareholders are starting to play a dangerous game.

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That’s because Apple’s valuations have started to reflect a “this time it’s different” mentality: that the company’s successes can continue forever. But despite Apple’s history of defying expectations, the company that Steve Jobs and Tim Cook built may not be able to repeat past performances.

AAPL Stock: Blowing Away Past Expectations

As a high-growth company, Apple seems to have ignored the standard rules of quantitative valuation. Its stock trades at a high 33 times forward earnings (P/E ratio) and shows no signs of slowing.

Academics might scratch their heads. Studies have consistently found that long-term returns shrink when stocks are expensive. Shouldn’t Apple work the same way?

But the usual rules haven’t applied to the tech giant. Each time Apple has released a blockbuster product like the iMac, iPod and iPhone, its performance has consistently blown high expectations out of the water.

In other words, Apple’s high valuations have meant even more significant gains ahead.

Source: Chart by InvestorPlace, data courtesy of Gurufocus

For instance, when Apple released the first-generation iPod in 2001, its P/E ratio jumped from 35x to 145x. Value investors would have probably thrown in the towel and sold out.

But they would have been wrong.

Three years later, the iPod’s proved even more successful than anyone could have expected. Apple’s P/E jumped to 211x, and its share price tripled. By the time the iPhone was released in 2007, AAPL had soared 1,017% and was shipping over 50 million units per year. The iPhone would create similar startling gains for the company.

More Short-Term Gains to Come

With Apple’s stock soaring today, can the company repeat its past performance?

I address this question in my Quantitative Stock Ranker (QSR), where AAPL scores in the top 10% of all U.S companies, earning it an “A” grade.

Apple justifies its somewhat pricey 3.3% earnings yield thanks to its exceptionally high return on invested capital (ROIC). Every dollar invested in the company generates a stunning 190% return. That’s light years ahead of the average company, which produces only ~20% returns.

Apple’s revenue growth also continues to surprise to the upside. The company has deftly navigated the coronavirus pandemic and its sales to the rise of work-from-home. Q2 earnings showed 10.9% revenue growth from a year earlier.

The QSR scoring system takes these factors into account to award Apple such an unusually high score for such a large company. And the proof is in the pudding: Apple has been moving from selling high-margin iPhones to even higher margin apps and media. Its services segment, which includes the App Store, has grown from just 8.5% of 2015 revenue to almost 20% today.

So far, these gains have offset declines in iPhone sales. But what do the QSR scores say about Apple’s long-term future?

AAPL Long-Term Not as Promising

Two key issues emerge as we dig deeper into Apple’s QSR scores.

1. Slowing Growth. Apple’s $2.2 trillion enterprise value makes it more than twice as valuable as Standard Oil at its peak, adjusted for inflation. That means Apple’s growth will become even more challenging to achieve. A decline of EBITDA and revenue growth to 4.4% (the median forecast of sell-side analysts) would drop AAPL’s overall ranking to 61%, or a “B.”

2. Declining ROIC. Apple’s sky-high ROIC has been steadily declining since 2015, the year Apple observers have dubbed “Peak iPhone.” While the App Store has helped offset some declines in ROIC, it hasn’t been enough to completely plug the iPhone’s gap. If ROIC drops to 60% (halfway between Microsoft and Google), AAPL’s QSR score drops to 51% or a “B-minus.”

These two signals warn of tough times ahead. Slowing growth and declining ROIC are hallmarks of sunset industries, such as oil and gas, and make for poor long-term investments.

While Apple certainly isn’t in a sunset industry, the same forces still apply for high-growth, high-profit companies returning to earth.

Can Apple Regain its 2015 Mojo?

Investors today are gambling that Tim Cook, Apple’s CEO, will create an iPhone killer. And their hopes rest on two potential champions:

1. The App Store. Apple has benefited massively from its app store, where it takes a 30% cut on all sales. Gross margins in Services rose from 55.0% in 2017 to 63.7% in 2019.

2. Apple TV. The company reportedly spent $6 billion on its initial TV lineup, and now boasts 33 million subscribers.

However, two key issues dog Apple’s champions. Firstly, the App Store’s pricing may violate international anti-trust laws. While U.S. courts have generally sided with Apple, European regulators have been far harsher. In February, French courts fined Apple a record $1.23 billion for price-fixing. And as EU anti-trust courts turn their attention to the App Store, Apple’s fat margins could quickly erode.

Secondly, Apple inflates its TV numbers. To reach 33 million subscribers, the company offered a free year for ALL device owners. And according to reports by Bloomberg, only half of TV+ subscribers actively use the service. Will viewers turn into subscribers as 1-year trials start to expire in 2021? Many reviewers have said “no”.

How to Value AAPL Stock

These factors make AAPL stock a worrying long-term bet. And at 25 times EV/EBITDA, the company isn’t cheap; the last time it hit that valuation was in 2007 during the first iPhone launch.

To justify its current share price, the company will have to grow revenues at 6% through 2024 and raise EBITDA margins from 29.4% to 35% to maintain its QSR “A-grade” ranking. These are numbers Apple last reached leading up to its 2015 “peak iPhone” years.

Can this happen? If software and streaming services take off, Apple will undoubtedly meet (and possibly exceed) those goalposts.

And they will have to hit those lofty targets. Lowering long-term growth to 4% still puts AAPL’s QSR grade far above average, but suggests a 34% downside. That means, if CEO Tim Cook can’t pull another rabbit out of the hat, then long-term investors should better watch out.

On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.