We keep our $185 per share fair value estimate for wide-moat Apple (AAPL) after an impressive fall product event aligned with our long-term expectations. We continue to see Apple as a differentiated consumer technology provider with tight integration between its hardware and software driving a wide economic moat. The iPhone is the linchpin of this ecosystem.
• Fair value estimate: $185
• Morningstar Rating: 2 stars
• Economic Moat Rating: Wide
• Uncertainty Rating
What We Thought of Apple’s New Product Event
We were pleased with the new iPhone 16 lineup and believe these models will spur a strong growth cycle for Apple in fiscal 2025 as consumers look to use generative artificial intelligence features. Still, we believe overly bullish expectations are baked into Apple’s stock price. To us, investors would need to expect 20% iPhone revenue growth in fiscal 2025 to justify the firm’s current valuation. Our own forecast is closer to 10% iPhone revenue growth in fiscal 2025, and we see shares as overvalued.
Apple unveiled its iPhone 16 lineup, releasing in the US on September 20. As we expected, generative AI features were at the heart of the announcements. Apple Intelligence, the firm’s suite of AI features, requires the most advanced hardware to operate, and we were pleased to hear that it will be available on all iPhone 16 models, as well as the iPhone 15 Pro and Pro Max. Apple is marketing its generative AI features as personal, creative, and productive, with the ability to rewrite emails, summarize and prioritize notifications, and take actions across applications. We see these features as powerful and attractive, and believe they will spur consumers to purchase new iPhones sooner, driving better revenue growth in fiscal 2025.
iPhone Prices Held
Outside of AI, Apple announced evolutionary advancements to iPhone chip performance, durability, battery life, display, and the cameras that we saw positively. Importantly, the iPhone 16 models are starting at the same prices as the iPhone 15 lineup did in 2023, even with significant hardware improvements. This adheres to our forecast for fiscal 2025 revenue to be primarily driven by unit sales growth.
Apple’s election not to raise pricing is positive for consumers and represents a multiyear reduction in real pricing when adjusting for inflation. To us, this shows Apple’s focus on increasing its installed base of sticky customers, which it is excellent at retaining with its software and services integration. Apple’s services revenue has been its fastest-growing segment for three years as it wraps media streaming, advertising, and subscriptions into its ecosystem. Rising services revenue has contributed to expanding profitability at Apple, and we expect gross margin to continue its upward trajectory even as Apple foregoes pricing increases for the iPhone 16 lineup.
Outside of the iPhone, Apple announced the new Watch Series 10 and updates to the entire AirPods lineup. We saw these upgrades as evolutionary, with a continuing focus on health and fitness as well as further incorporation of AI and machine learning features. We believe all of these updated models can drive a return to growth for Apple’s wearables revenue in fiscal 2025.
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