Apple (AAPL) released its fiscal Q1 earnings report on February 1. Here’s Morningstar’s take on Apple’s earnings and stock.
Apple’s results showed better iPhone revenue in the December quarter than we expected, as well as better profitability. iPhone revenue was driven by the launch of the iPhone 15 lineup, and the improved profitability stems from a higher mix of services and higher-end products like the iPhone Pro models. However, revenue guidance for the March quarter fell below our expectations.
In the short term, we see demand headwinds for Apple relating to elongating personal device replacement cycles and more aggressive domestic alternatives in China. In the long term, we maintain our view that Apple can drive growth from its unique combination of hardware, software, and services, which also elicits steep customer switching costs and underpins our wide moat rating.
We believe guidance for weaker iPhone revenue in the March quarter portends weaker iPhone revenue for fiscal 2024 (ending in September). In our view, Apple’s current share price reflects overly rosy expectations for iPhone sales over the next five years, and our more modest forecast leads us to see the stock as overvalued.
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 think has accelerated its product development and increased its differentiation.
- Apple has a stellar balance sheet and sends great amounts of cash flow back to shareholders.
AAPL Bears Say
- Apple is prone to consumer spending and preferences, which creates cyclicality and opens the firm to disruption.
- Apple’s supply chain is highly concentrated in China and Taiwan, which leaves 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.
Is Apple Stock Fairly Valued?
With its 2-star rating, we believe Apple’s stock is overvalued 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%.
We project 6% compound annual revenue growth for Apple through fiscal 2028. The iPhone will be the greatest contributor to revenue over our forecast, and we project 3% growth for iPhone revenue over the next five years. We expect this to be driven primarily by unit sales growth, with modest pricing increases. We think pricing increases will be driven primarily by higher features and a mix shift toward the more premium Pro models.
Services are Apple’s next biggest revenue contributor over our forecast, and we predict 8% revenue growth in this segment. Services are driven in large part by revenue from Google, thanks to its status as the default search engine on the Safari browser, as well as Apple’s cut of App Store sales. We expect solid growth in Google revenue, but we see a more mixed outlook for App Store results. There we forecast growth in overall app revenue but progressively lower cuts going toward Apple as the result 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 see the highest growth opportunity in Apple’s wearables revenue, to the tune of 18% through fiscal 2028, primarily driven by our expectations for the ramp of the new Vision Pro headset. We project a rapid ramp for Vision Pro, approaching 10 million unit sales and $30 billion in revenue in fiscal 2028. We see high-single-digit growth for Apple Watch and AirPods sales, with both products continuing to gain share.