Apple(AAPL)is set to release its first-quarter earnings report on May 2. Here’s Morningstar’s take on what to look for in Apple’s earnings and stock.
We anticipate a weak quarter for iPhone sales, which Apple has guided Wall Street to expect. This should spur a poorer overall quarter for the firm, as the iPhone remains its primary driver. iPhone sales have faced headwinds in China from stronger domestic alternatives and national security concerns. We also believe that lengthening replacement cycles for consumers globally weighs on growth.
We expect another quarter of strong profitability for Apple helping offset weaker sales growth. Apple benefits from a higher mix of its services business and more consumers opting for premium options like the iPhone Pro models.
We don’t believe there will be any material announcement on artificial intelligence, but we will keep our ears open. A lack of updates about generative AI has weighed on Apple’s share performance this year, but we think the firm will make an announcement this summer, so it doesn’t worry us. We think Apple is following its premium follower strategy (entering a market late but with a superior product), as it did with smartphones and VR headsets.
Key Morningstar Metrics for Apple Stock
• Fair Value Estimate: $160.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
AAPL Bulls Say
• Apple offers an expansive ecosystem of tightly integrated hardware, software, and services, which locks in customers and generates strong profitability.
• We like Apple’s move to in-house chip development, which we believe has accelerated its product development and increased its differentiation.
• Apple has a stellar balance sheet and sends a lot of cash flow back to shareholders.
AAPL Bears Say
• Apple is prone to consumer spending and preferences, which creates cyclicality and opens it to disruption.
• Apple’s supply chain is highly concentrated in China and Taiwan, making the firm vulnerable to geopolitical risk. Attempts to diversify into other regions may pressure profitability or efficiency.
• Regulators have a keen eye on Apple, and recent regulations have chipped away at parts of its sticky ecosystem.
Fair Value Estimate for Apple Stock
With its 3-star rating, we believe Apple’s stock is fairly valued compared with our long-term fair value estimate of $160 per share. Our valuation implies a fiscal 2024 adjusted price/earnings multiple of 25 times, a fiscal 2024 enterprise value/sales multiple of 7 times, and a fiscal 2024 free cash flow yield of 4%.
Services are Apple’s next-biggest revenue contributor over our forecast, and we predict 8% growth in revenue here. This segment is largely driven by revenue from Google (thanks to its status as the default search engine on the Safari browser) and Apple’s cut of App Store sales. We expect solid growth in Google revenue but a mixed outlook for App Store results. We anticipate growth in overall app revenue but progressively lower cuts going to Apple because of regulatory pressures. Elsewhere, we see roughly high-single-digit growth across revenue from Apple Music, Apple TV+, Apple Pay, AppleCare, and Apple’s other services.
We forecast gross margins to rise to 48% in fiscal 2028, up from 44% in fiscal 2023. We believe Apple can see margin expansion from a higher mix of higher-margin hardware like iPhone Pro models, the Vision Pro headset, and services. We also expect the firm to continue using R&D to trim costs and develop new features, especially by creating more cost-efficient semiconductors.
