Apple Earnings: iPhone Demand Steady, While Services and Gross Margins Steal the Show

Key Morningstar Metrics for Apple

• Fair Value Estimate: $150.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Apple’s Earnings

Apple AAPL reported solid fiscal fourth-quarter results while providing investors with a decent outlook for its fiscal first quarter, with revenue in line with our expectations but modestly below FactSet consensus estimates, which we think contributed to the 3% selloff in shares after hours.

We maintain our fair value estimate of $150 per share and view shares as modestly overvalued, as we don’t foresee massive hardware growth in the years ahead out of existing products like the iPhone.

Revenue in the September quarter was $89.5 billion, down 1% year over year but up 9% sequentially. iPhone revenue of $43.8 billion was in line with our expectations, and we view it as a good sign that demand for the iPhone 15 series will be resilient this year, albeit within a shaky macroeconomic environment.

Services revenue of $22.3 billion was impressive, up 16% year over year, as the company continues to capture more paid subscribers and monetize the benefits of the iOS ecosystem by upselling more apps and services to its customers. Gross margin was also terrific at a record high of 45.2%, ahead of guidance, thanks to a favorable cost environment for components (likely memory chips), but we also think Apple is reaping some cost benefits from deploying its in-house processors within iPhones, iPads, and more recently Macs.

Apple’s revenue guidance for the December quarter had a couple of moving parts, but in total, it should be flattish year over year. IPad and wearables revenue should be down significantly due to the timing of new product launches versus the same period a year ago.

IPhone revenue should be up modestly, Mac revenue should be up nicely (again due to product launch timing), and services should be a fast-growing segment. Gross margin guidance of 45%-46% is exciting, although we attribute it more to product mix and a lower proportion of sales of lower-margin iPads and Wearables. Overall, we remain impressed with Apple’s innovation, particularly with the upcoming Vision Pro.

Resilient iPhone Demand

We remain encouraged in this area. We weren’t anticipating another super cycle year out of the iPhone, but given what seems to be a softening macroeconomic environment, we wouldn’t have been stunned if Apple’s iPhone guidance was even worse. In the September quarter, Apple hit all-time records in revenue (both in total and for the iPhone) in India, which is a good sign for the company’s aspirations to acquire more users in the country.

Apple also set a September-quarter record for iPhone sales in mainland China. We think Huawei’s new Mate 60 Pro might gain some share from Apple in the region, but not meaningfully so. Apple appears to have been one of the larger share gainers when the U.S. placed restrictions on Huawei that devastated its handset efforts, so we wouldn’t be surprised if Apple were to give some share back. However, we think switching costs around iOS remain high, while the iPhone 15 series is the more technologically advanced of the two devices. We think Apple’s revenue guidance implies that the damage from Huawei’s new product will be minimal.