Going Into Earnings, Is Apple Stock a Buy, a Sell, or Fairly Valued?

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.

Key Morningstar Metrics for Apple

• Fair Value Estimate: $160.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Earnings Release Date

• Thursday, May 2, after the close of trading

What to Watch for In Apple’s Q1 Earnings

• 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.

Fair Value Estimate for Apple

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.

Read more about Apple’s fair value estimate.

Economic Moat Rating

We assign Apple a wide moat, 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 them 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 its 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 its vast ecosystem of developer partners. These elements elicit great profitability and returns on invested capital. In our view, Apple can leverage them into continued economic profits over the next 20 years.

Read more about Apple’s economic moat.

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 eventually become cash-neutral, with no set timetable. We don’t anticipate the company to hit this target in the next five years, but it should progress toward it. Since announcing the goal in 2018, Apple has reduced its net cash position by more than half, from over $100 billion.

Read more about Apple’s financial strength.

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 “super app.” We view the firm defending against this risk 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.

We also see geopolitical risk arising from Apple’s supply chain. It heavily depends on Foxconn for its assembly and Taiwan Semiconductor TSMC for chip production. Apple could see a severe hit to its supply if relations soured between the United States and China, or if China threatened Taiwan. Additionally, the Chinese government has recommended that government officials not conduct business on iPhones, which risks Apple’s sales in the country.

Read more about Apple’s risk and uncertainty.

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.

This article was compiled by Leona Murray.