It's been a heck of a ride for Apple investors. The stock, which has nearly doubled so far this year, will likely bounce after its latest quarterly earnings report.  Over the past five years the stock has gained an average of 56% a year, an extraordinary achievement.  But if you are investor in this stock, brace yourself for a dose of reality. The shares' best days are surely behind them. Future returns will be much more modest -- and the risks will be greater.  Yes, Apple Inc. is a great company that makes terrific products. Steve Jobs can lay a plausible claim to the title of the world's most successful chief executive.  Apple Inc. chief executive Steve Jobs remains a mystery to investors.  But do the math. Once the nimble outsider in the computer industry, Apple is now valued at $135 billion. It's the tenth most valuable company in America and 19th world-wide. For the shares to rise at a similar rate from here would take it to $1.25 trillion by 2014. Even to grow at a more modest 20% a year would take it to $333 billion -- more valuable than ExxonMobil today and twice the value of Procter & Gamble or Johnson & Johnson.  Anything is possible, but that's quite a bet.  Apple stock is not especially expensive: Perhaps 26 times forecast earnings. That's still not dirt cheap, and you'll need to see fair amount of growth to justify the price.  But many markets are looking saturated, and competition is heating up.  The iPod growth story now appears to be over. Shipments of iPods fell 7% from the first quarter -- during the depths of the financial crisis -- to the second. And prices fell even faster than that, despite the growth of the more expensive iPod Touch.  Revenues from selling Mac computers actually fell 8% last quarter compared to a year ago. The company sold just 4% more Macs than it did in the same period last year, and this time at a lower price point.  Last quarter's growth came from iPhones. Apple stock is now a mobile phone stock. And that's a brutal business. Apple is competing with the likes of Research In Motion's BlackBerry, phones running Google's Android platform, and many others including Nokia, SonyEricsson and even Palm.  Sure, Apple may even defeat them all. Few of them are that impressive. The wondrous thing about the iPhone is not how Apple did it, it's why Nokia or SonyEriccson or Palm didn't do it years earlier.  But even if the iPhone defeats all takers, what will happen to profit margins? This is an industry of mutual assured destruction.  And then there is the issue of Steve Jobs' health. This remains a major worry. He was notably absent from the company's conference call. Mr. Jobs isn't as important as he seems: He is more so. For ten years he has given Apple focus -- the one thing that every organization desperately needs, and which very few executives provide. He has targeted Apple like a laser beam on a few brilliantly successful projects.  Apple chief operating officer Tim Cook, who has been running the company in Mr. Jobs' absence, may turn out to be as brilliant as his predecessor. But it's highly unlikely.  That said, you don't have to be a raging bear on Apple, because the company is both unlevered and a cash machine. At June 27, it had $42 billion in cash, equivalents and marketable securities,and $22.3 in short-term liabilities. So it could actually hand out $20 billion -- or just over $20 a share -- as a special dividend without tapping credit markets. If it wanted to borrow, it could hand out more.  Furthermore it ought to see substantial growth from emerging Asia in the years ahead, although at the moment such sales are tiny.  But it's hard to see this company as a bargain. The issue isn't whether the stock is certain to go up or down, it's where the balance lies in terms of risk and reward.  Write to Brett Arends at brett.arends@wsj.com
Apple's stock has performed extraordinarily well in the last five years. But as it begins to resemble a cellphone company, investors can expect tougher times ahead, writes Brett Arends.