Ahead of Earnings, is Apple Stock a Buy or Sell?

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.

Key
Morningstar
Metrics
for
Apple
Stock

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

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.

Fair
Value
Estimate
for
Apple
Stock

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.

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