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Apple (AAPL) released its fiscal third-quarter earnings report on August 1, 2024. Here’s Morningstar’s take on Apple’s earnings and the outlook for Apple stock.
• We raised our fair value estimate for Apple to $185 per share from $170. Our higher valuation reflects our raised expectations for longer-term iPhone growth, inclusive of what we expect to be a strong year of growth in fiscal 2025, spurred by the introduction of generative AI functionality on the newest iPhones.
• Apple continues to face growth headwinds in China, with ramped-up domestic smartphone alternatives weighing on sales.
• Services revenue is firmly the firm’s second-largest driver (behind the iPhone) and is growing in the double digits in fiscal 2024, which we view positively.
• Despite our bullish expectations for a strong iPhone upgrade cycle in fiscal 2025, we continue to see shares as overvalued. We believe investors would need to assume close to 20% iPhone growth in fiscal 2025 to justify Apple’s current share price, compared with our expectations of closer to 10%.
Key Morningstar Metrics for Apple
• Fair Value Estimate: $185.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
Fair Value Estimate for Apple
With its 2-star rating, we believe Apple’s stock is overvalued compared with our long-term fair value estimate of $185 per share.
Our fair value estimate for Apple is $185 per share. Our valuation implies a fiscal 2024 adjusted price/earnings multiple of 28 times, a fiscal 2024 enterprise value/sales multiple of 7 times, and a fiscal 2024 free cash flow yield of 4%.
We project 7% compound annual revenue growth for Apple through fiscal 2028. The iPhone will be the greatest contributor to revenue over our forecast, and we project 6% 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 iPhone Pro models.
Apple’s Economic Moat Rating
We assign Apple a wide economic moat rating, stemming from customer switching costs, intangible assets, and a network effect. In our view, Apple’s iOS ecosystem extends far-reaching, sticky tendrils into customers’ wallets, entrenching customers with software capabilities and integration across disparate devices like the iPhone, Mac, iPad, Apple Watch, and more. We also see immense design prowess at Apple, most impressively from deep integration of hardware, software, and semiconductors to create best-of-breed products. Finally, we see a virtuous cycle between Apple’s affluent customer base and vast ecosystem of developer partners. These moat sources elicit great profitability and returns on invested capital. In our view, Apple can leverage these moat sources into continued economic profits over the next 20 years, more likely than not.
Financial Strength
We expect Apple to focus on using its immense cash flow to return capital to shareholders while increasing its net leverage over the medium term. Apple has a terrific balance sheet, with a net cash position of $51 billion as of September 2023. Management has laid out a goal to become cash-neutral eventually, with no set timetable. We don’t anticipate it hitting this target in the next five years but to progress toward it. Since announcing the goal in 2018, Apple has reduced its net cash position by more than half, from over $100 billion.
Risk and Uncertainty
We assign Apple with a Medium Uncertainty Rating. We see the firm’s greatest risk as its reliance on consumer spending, for which there is great competition and cyclicality. Apple is at constant risk of disruption, just as the iPhone disrupted BlackBerry in the budding smartphone market. The iPhone could be unseated by a new device or “superapp.” We view the firm defending against this risk, however, by introducing new form factors (like a watch and an augmented reality headset) and selling an ecosystem of software and services on top of hardware.
Apple 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.
Apple Bears Say
• Apple is prone to consumer spending and preferences, which creates cyclicality and opens the firm up to disruption.
• Apple’s supply chain is highly concentrated in China and Taiwan, which opens up the firm 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 Apple’s sticky ecosystem.
