Apple Earnings: A Weak 2024, but Optimism for 2025

Key Morningstar Metrics for Apple

• Fair Value Estimate: $170.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Apple’s Earnings

We raise our fair value estimate for wide-moat Apple AAPL to $170 per share from $160, behind higher expectations for iPhone and services revenue in the medium term. Apple’s March-quarter results were aligned with our model, although June-quarter guidance was below our rosy expectations. We expect a soft fiscal 2024 for Apple, driven by headwinds to iPhone revenue in China and slower iPhone refreshes globally. However, we raised our forecast for iPhone revenue growth in fiscal 2025 in anticipation of a stronger refresh cycle for the iPhone 16 in fall 2024 (Apple’s first fiscal quarter.) We expect Apple’s generative artificial intelligence product announcements this year will drive improved growth next year. Shares rose after hours in line with our valuation raise, which we attribute to lower iPhone downside out of China than investors may have feared. Shares look fairly valued to us.

March-quarter revenue declined 4% year over year to $90.8 billion, in line with our model. IPhone revenue is Apple’s primary driver, and it fell 10% year over year. The year-over-year comparison was affected by $5 billion in revenue last year, pushed into the March quarter due to supply constraints in the December quarter. Adjusting for this, iPhone and total Apple revenue was closer to flat year over year. We still view current iPhone revenue levels as soft, with more domestic competition in China and slowing refresh cycles globally as headwinds to growth. Apple’s services revenue continues a strong growth trajectory and rose 14% year over year. We believe that services growth is benefitting from higher payments from Google for its default position in Safari and the broadly higher utilization of Apple’s ecosystem despite softer iPhone unit sales.

June-quarter guidance missed our optimistic expectations but aligned with FactSet consensus estimates. Apple is guiding for low-single-digit year-over-year growth, which we think implies flat iPhone revenue and double-digit services growth.

Will iPhone 16 Get Generative AI?

Apple’s gross margin of 46.6% in the March quarter was strong and rose 230 basis points year over year despite a year-over-year revenue decline. In our view, Apple’s gross margin expansion is supported by a higher mix of services and a higher mix of Google’s payments within services, which comes at a practically 100% gross margin. We also believe a higher mix of premium products, like iPhone Pro models, will improve product gross margins over the medium term. The product gross margin declined 10 basis points year over year, which we attribute to lower iPhone revenue.

We’ve raised our forecast for iPhone revenue in fiscal 2025, as we expect Apple to build some generative AI functionality into the iPhone 16, likely releasing in late September, with peak revenue from the device in the December quarter. We believe Apple will make an announcement surrounding generative AI at its developer conference in June, where it typically announces its new iOS software for the iPhone. After what we expect to be two straight years of lower iPhone revenue in fiscal 2023 and 2024, we believe a stronger refresh cycle can occur in fiscal 2025 with more exciting new features underpinned by AI. We surmise that the initial features to benefit from generative AI would be Apple’s Siri voice assistant, messages, and Safari browser.