Apple Earnings: Sales Impress But Stock Still Overvalued

Key Morningstar Metrics for Apple

• Fair Value Estimate: $185.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Apple’s Earnings

We raised our fair value estimate for shares of wide-moat Apple AAPL to $185 from $170 after raising our medium-term iPhone revenue forecast. We continue to expect strong revenue growth in fiscal 2025 as users upgrade their iPhones to take advantage of Apple’s generative artificial intelligence features, requiring the latest and greatest hardware. We now forecast double-digit iPhone revenue growth in fiscal 2025 and another strong year of revenue growth in fiscal 2026. IPhone revenue remains the primary driver of Apple’s results. We see it as the linchpin to the firm’s walled garden ecosystem of hardware, software, and services, which underpins our wide moat rating and long-term growth thesis. However, we continue to see shares as overvalued. Apple’s current stock price implies closer to 20% iPhone revenue growth in fiscal 2025, which we see as lofty given headwinds to growth in China and slowing consumer phone upgrade cycles.

Generative AI to Boost Growth

Apple’s June-quarter revenue and September-quarter guidance were above our model, driven by better performance for the iPhone than we feared. June-quarter revenue of $85.8 billion rose 5% year over year. IPhone revenue declined 1% year over year, and we believe guidance implies a return to year-over-year iPhone revenue growth in the September quarter. IPhone growth has been hampered in the past several quarters by greater domestic competition in the Chinese market, as well as extending hardware upgrade cycles in other markets. We expect generative-AI functionality to drive a return to growth in fiscal 2025. Services continued double-digit year-over-year growth, and we see this as Apple’s second-largest driver at roughly 25% of total revenue.

We remain impressed with Apple’s profitability and ability to expand margins. June-quarter gross margin rose 180 basis points year over year to 46.3%. We expect a rising mix of services revenue and higher levels of vertical integration to drive incremental margin expansion over the next five years.

Apple iPhone 16 Coming in Q3

September-quarter guidance implies roughly 5% year-over-year revenue growth, inclusive of double-digit services revenue growth. To meet this guidance, we expect iPhone revenue to rise in the low-single digits. We expect the release of Apple’s iPhone 16 lineup to occur in September and drive stronger growth in fiscal 2025, which starts in October. In our view, the firm’s suite of generative-AI features, dubbed Apple Intelligence and announced in early June, should drive consumers to upgrade to new models. Apple Intelligence requires greater memory chip content, currently only available on the iPhone 15 Pro and 15 Pro Max models. We expect sufficient memory content for Apple Intelligence across the iPhone 16 lineup, which should also uplift pricing. Our expectations for greater unit sales and higher pricing drive our optimistic expectations for double-digit iPhone revenue growth in fiscal 2025.