Apple Earnings: iPhone Growth Forecasts Drive Change in Fair Value

However,
we
raised
our
forecast
for
iPhone
revenue
growth
in
fiscal
2025
in
anticipation
of
a
stronger
refresh
cycle
for
the
iPhone
16
in
fall
2024
(Apple’s
first
fiscal
quarter.)
We
expect
Apple’s
generative
artificial
intelligence
product
announcements
this
year
will
drive
improved
growth
next
year.
Shares
rose
after
hours
in
line
with
our
valuation
raise,
which
we
attribute
to
lower
iPhone
downside
out
of
China
than
investors
may
have
feared.
Shares
look
fairly
valued
to
us.

Key
Morningstar
Metrics
for
Apple

•
Fair
Value
Estimate:
$170
•
Morningstar
Rating:
3
stars
•
Morningstar
Economic
Moat
Rating:
Wide
•
Morningstar
Uncertainty
Rating:
Medium

iPhone
Revenue
is
Soft

March-quarter
revenue
declined
4%
year
over
year
to
$90.8
billion,
in
line
with
our
model.
IPhone
revenue
is
Apple’s
primary
driver,
and
it
fell
10%
year
over
year.
The
year-over-year
comparison
was
affected
by
$5
billion
in
revenue
last
year,
pushed
into
the
March
quarter
due
to
supply
constraints
in
the
December
quarter.
Adjusting
for
this,
iPhone
and
total
Apple
revenue
was
closer
to
flat
year
over
year.
We
still
view
current
iPhone
revenue
levels
as
soft,
with
more
domestic
competition
in
China
and
slowing
refresh
cycles
globally
as
headwinds
to
growth.
Apple’s
services
revenue
continues
a
strong
growth
trajectory
and
rose
14%
year
over
year.
We
believe
that
services
growth
is
benefitting
from
higher
payments
from
Google
for
its
default
position
in
Safari
and
the
broadly
higher
utilisation
of
Apple’s
ecosystem
despite
softer
iPhone
unit
sales.

June-quarter
guidance
missed
our
optimistic
expectations
but
aligned
with
FactSet
consensus
estimates.
Apple
is
guiding
for
low-single-digit
year-over-year
growth,
which
we
think
implies
flat
iPhone
revenue
and
double-digit
services
growth.

Will
iPhone
16
Get
Generative
AI?

Apple’s
gross
margin
of
46.6%
in
the
March
quarter
was
strong
and
rose
230
basis
points
year
over
year
despite
a
year-over-year
revenue
decline.
In
our
view,
Apple’s
gross
margin
expansion
is
supported
by
a
higher
mix
of
services
and
a
higher
mix
of
Google’s
payments
within
services,
which
comes
at
a
practically
100%
gross
margin.
We
also
believe
a
higher
mix
of
premium
products,
like
iPhone
Pro
models,
will
improve
product
gross
margins
over
the
medium
term.
The
product
gross
margin
declined
10
basis
points
year
over
year,
which
we
attribute
to
lower
iPhone
revenue.

We’ve
raised
our
forecast
for
iPhone
revenue
in
fiscal
2025,
as
we
expect
Apple
to
build
some
generative
AI
functionality
into
the
iPhone
16,
likely
releasing
in
late
September,
with
peak
revenue
from
the
device
in
the
December
quarter.
We
believe
Apple
will
make
an
announcement
surrounding
generative
AI
at
its
developer
conference
in
June,
where
it
typically
announces
its
new
iOS
software
for
the
iPhone.
After
what
we
expect
to
be
two
straight
years
of
lower
iPhone
revenue
in
fiscal
2023
and
2024,
we
believe
a
stronger
refresh
cycle
can
occur
in
fiscal
2025
with
more
exciting
new
features
underpinned
by
AI.
We
surmise
that
the
initial
features
to
benefit
from
generative
AI
would
be
Apple’s
Siri
voice
assistant,
messages,
and
Safari
browser.

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