Key Points
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The law of large numbers makes it unlikely that Apple stock under Ternus will match the performance it delivered under Cook.
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Ternus could still deliver strong results for shareholders if he drives earnings growth and improves Apple’s position in the AI space.
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New Apple (NASDAQ: AAPL) CEO John Ternus has a tough act to follow. The previous CEO, Tim Cook, took over from Apple co-founder Steve Jobs, and though he lacked Jobs’ genius for innovation, under his tenure, the company achieved massive growth.
The area where Cook was less successful was in making Apple a top AI company. That leaves Ternus with an opportunity to stand out and reinvigorate the tech stock‘s growth. Still, Apple under Ternus is unlikely to match its growth curve under Cook, and here’s why.
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Ternus’ growth challenge
Unfortunately, several basic mathematical advantages that benefited Apple during Cook’s tenure do not apply today.
One of those is the P/E ratio. As previously mentioned, Cook had the task of growing the company without the advantage of Jobs’ gifts for guiding innovative design. Apple traded at around 15 times earnings when he took the helm in August 2011.
After years of trading at a discount, the company’s multiple finally expanded in the 2020s, and the stock’s P/E ratio rose to 36, which by itself more than doubled Apple’s value.
Moreover, Cook’s business successes took the market cap to around $4.6 trillion, an increase of more than 13-fold, which made Apple one of the three most valuable companies in the world. Today, with no company yet reaching the $6 trillion market cap milestone, Apple faces resistance from the law of large numbers.
If Ternus increased growth by the same percentage, the company’s market cap would grow to $60 trillion. Although investors should expect it to hit new market cap records in the coming years, an increase to that level is unlikely simply because the company is so large that further growth is constrained. The entire U.S. stock market is currently valued at around $75 trillion.
What investors should expect
Fortunately, as previously stated, Ternus can still succeed by building Apple’s position in AI. Despite Apple’s vast ecosystem and massive financial resources, its AI never resonated with customers under Cook.
Apple began developing AI-ready iPhones three years ago, but that did not immediately lead to a strong device upgrade cycle. Furthermore, Apple’s struggles with AI forced it to align with Alphabet, Google’s parent company, to supply foundational models for its products.
Now, Ternus plans an overhaul focused on engineering. He is working to integrate AI into its products and to emphasize personalized experiences. Additionally, he has delegated some duties usually handled by the CEO to other executives so he can spend more time on the engineering side of the business.
That engineering-based approach could mean that his success or failure will depend on Apple’s AI-related success.
Moving forward with Apple stock
Ultimately, Apple’s rising valuation and the law of large numbers almost certainly mean the stock can’t grow as fast under Ternus as it did under Cook.
Since Apple’s P/E ratio more than doubled under Cook to a relatively high level, a sustained doubling of that earnings multiple again is unlikely. Moreover, given its huge market cap, another 13-fold gain in the company’s value would require it to grow its sales and earnings to an economically unreasonable level.
However, if Ternus can build a successful AI business around its product lines, it is likely the stock will keep rising. Thus, investors should probably pay more attention to Apple’s AI successes than to how the stock price growth under Ternus compares to that of his predecessor.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool has a disclosure policy.
