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

Apple released its fiscal third-quarter earnings report on July 31. Here’s Morningstar’s take on Apple’s earnings and stock.

Key Morningstar Metrics for Apple

• Fair Value Estimate: $210.00
• Morningstar Rating: ★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Apple’s Q3 Earnings

Apple’s June-quarter results were well ahead of its guidance. Revenue rose 10% year over year to $94 billion, with iPhone revenue rising 13% year over year to $44.6 billion. Services revenue rose 13% to $27.4 billion. September-quarter guidance calls for mid- to high-single-digit growth.

Why it matters: IPhone revenue was $5 billion above our model, which we attribute both to strong demand and some tariff-related pull-in of future demand. We see management’s $850 million pull-in estimate as slightly conservative. Nevertheless, iPhone 16 unit sales exceeded our expectations.

• Tariffs were an 80-basis-point gross margin headwind in the quarter. Management guidance implies 100 basis points of impact in the September quarter. Apple’s relatively low tariff impact is largely due to its main products being exempt, which is at risk of changing in the future.
• Apple is investing more capital in artificial intelligence, going forward. We like this, but see it coming several years later than we’d like. We believe its AI software needs major improvements to be more compelling, but we don’t see AI as a significant disrupter to the iPhone in the medium term.

The bottom line: We raise our fair value estimate for wide-moat Apple to $210 from $200 after raising our iPhone unit growth forecast. We see a partial short-term lift from pull-in, but also model a durable lift from better upgrade demand in the medium term. Shares look fairly valued.

• We model a roughly 15% valuation risk if Apple’s products lose their tariff exemption, based on a potential 25% tariff on imports from India, where Apple sources nearly all of its US-bound iPhones. We think the firm could offset about half of this with modest price increases.

Coming up: We expect the iPhone 17 family to release in September, potentially with a new slim form factor. We have low-single-digit iPhone unit growth expectations in fiscal 2026, even with a new form factor, as unit sales will compare to the pull-in so far in 2025.

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 $210 per share. We project 6% compound annual revenue growth for Apple through fiscal 2029. The iPhone will be the most significant contributor to revenue over our forecast, and we project 5% 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 a mix shift toward the more premium Pro models.

Services are Apple’s next-biggest revenue contributor over our forecast, and we forecast more than 10% services revenue growth over the next five years. Services are driven in large part by revenue from Google for its status as the default search engine on the Safari browser, as well as Apple’s cut of App Store revenue. We expect solid growth in Google revenue but see a more mixed outlook for App Store results, where we forecast growth in overall app revenue but progressively lower cuts going toward Apple later in the decade as a result of regulatory pressures. Elsewhere, we see mostly double-digit growth across revenue from Apple Music, Apple TV+, Apple Pay, AppleCare, and Apple’s other services.

We forecast gross margins to rise to 50% in fiscal 2029 from 46% in fiscal 2024. We believe Apple can see margin expansion from a higher mix of higher-margin hardware, like iPhone Pro models, and services. We also expect Apple to continue using R&D to both maintain pricing power and trim costs. R&D helps Apple develop new features, especially by creating more cost-efficient semiconductors and bringing more chip development in-house.

Read more about Apple’s fair value estimate.

Economic Moat Rating

We assign Apple a wide 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 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 vast ecosystem of developer partners. These qualities 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.

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 $50 billion as of September 2024. Management has laid out a goal to become cash neutral with no timetable. We model it to hit this target near the end of the decade. Since announcing the goal in 2018, Apple has reduced its net cash position by more than half, from over $100 billion.

Apple supplements its strong balance sheet with impressive cash flow. Over the last five years, the firm has averaged more than $95 billion in free cash flow generation annually, and we forecast more than $100 billion annually over the next five years. Since 2020, this cash flow has generated an average free cash flow margin of more than 25% and converted more than 100% of net income into free cash flow. We anticipate the firm to hit these figures over our five-year forecast.

Read more about Apple’s financial strength.

Risk and Uncertainty

We assign Apple 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 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 is heavily dependent on Foxconn and Taiwan Semiconductor for its assembly and chip production. If there were a souring of relations between the United States and China, or if China threatened Taiwan, Apple could see a severe hit to its supply. Additionally, the Chinese government has recommended that officials not conduct business on iPhones, which presents a current and potential future risk to Apple’s revenue in China.

Finally, we see low environmental, social, and governance risk for Apple. The firm has committed to full carbon neutrality by 2030, and we believe it will achieve its goal. The potential future loss of talented human capital could be another risk on this front.

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 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 up to disruption.
• Apple’s supply chain is highly concentrated in China and Taiwan, which opens 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.

This article was compiled by Isela Meraz.