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

Apple is set to release its third-quarter earnings report on July 30. Here’s Morningstar’s take on what to look for in Apple’s earnings and our outlook for the stock.

Key Morningstar Metrics for Apple

• Fair Value Estimate: $200.00
• Morningstar Rating: ★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

Earnings Release Date

• Thursday, July 30, after the close of trading

What to Watch for in Apple’s Q3 Earnings

• As always, we look to iPhone revenue as the firm’s main driver. Growth has slowed in the past few years, with slower technological evolution in the iPhone, and artificial intelligence has yet to have a material impact on unit sales.
• Services remain the firm’s growth outlet, and we expect continued double-digit growth in the quarter and through the year.
• Apple looks fairly valued to us against our $200 fair value estimate. We think the market is valuing slower growth more adequately than it has historically, and there are myriad risks from tariffs and China exposure.

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 $200 per share. Our valuation implies a fiscal 2025 price/earnings multiple of 27 times, a fiscal 2025 enterprise value/revenue multiple of 7 times, and a fiscal 2025 free cash flow yield of 4%. Against our estimate of fiscal 2026 earnings, our valuation implies a price/earnings multiple of 23 times.

We project 7% compound annual revenue growth through fiscal 2029. The iPhone will be the most significant contributor to revenue over our forecast, and we project 6% 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.

Read more about Apple’s fair value estimate.

Economic Moat Rating

We assign Apple a wide economic 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 its 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 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 moat sources 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.

Apple’s ability to deliver cutting-edge products with tightly integrated hardware and software, along with its software ecosystem’s ability to lock in customers, results in impressive profit margins. On top of 45% gross margins, which are impressive for a consumer hardware provider, Apple’s asset-light model with outsourced manufacturing generates robust returns on invested capital, to the tune of roughly 50%. In our view, Apple’s sticky ecosystem and phenomenal engineering capabilities will enable it to continue earning strong 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 $50 billion as of September 2024. Management has laid out a goal to become cash neutral eventually, with no set 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, as well.

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, however, 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 for its assembly and Taiwan Semiconductor for chip production. The majority of iPhones are produced at a mega-factory in China by Foxconn, and the majority of Apple chips are produced in Taiwan by TSMC. 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 government officials not conduct business on iPhones, which presents a current and potential future risk to the firm’s revenue in the country.

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.

APPL 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.

APPL 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.