Going into Earnings, is Apple Stock a Buy, Sell, or Hold?

We
will
also
look
keenly
at
Apple’s
gross
margin,
which
has
been
on
a
steady
upward
trajectory
over
the
past
few
years
as
the
firm
has
brought
more
of
its
supply
chain
in-house
and
grown
its
services
business.

Finally,
we
will
look
for
continued
strong
(double-digit)
growth
in
services,
now
Apple’s
second-largest
business
at
about
a
quarter
of
total
revenues.

Key
Morningstar
Metrics
for
Apple

Fair
Value
Estimate:
$170.00

Morningstar
Rating: ★★

Morningstar
Economic
Moat
Rating:
Wide

Morningstar
Uncertainty
Rating:
Medium

Fair
Value
Estimate
for
Apple

With
its
2-star
rating,
we
believe
Apple’s
stock
is
overvalued
compared
with
our
long-term
fair
value
estimate
of
$170
per
share.
Our
valuation
implies
a
fiscal
2024
adjusted
price/earnings
multiple
of
26
times,
a
fiscal
2024
enterprise
value/sales
multiple
of
seven
times,
and
a
fiscal
2024
free
cash
flow
yield
of
5%.

We
project
6%
compound
annual
revenue
growth
for
Apple
through
fiscal
2028.
The
iPhone
will
be
the
greatest
contributor
to
revenue
over
our
forecast,
and
we
project
3%
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
higher
features
and
a
mix
shift
toward
the
more
premium
Pro
models.

Read
more
about
Apple’s
Fair
Value
Estimate

Economic
Moat

We
assign
Apple
a
wide
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
customer
wallets,
entrenching
them
with
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
its
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
its
vast
ecosystem
of
developer
partners.
We
believe
Apple
can
leverage
these
qualities
into
continued
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.
The
firm
has
a
terrific
balance
sheet,
with
a
net
cash
position
of
$51
billion
as
of
September
2023.
Management
has
set
a
goal
to
eventually
become
cash-neutral,
though
there
is
no
set
timetable.
We
don’t
anticipate
the
company
to
hit
this
target
in
the
next
five
years,
but
it
should
progress
toward
it.
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
$85
billion
in
free
cash
flow
generation
annually,
and
we
forecast
more
than
$100
billion
annually
over
the
next
five
years.
Since
2019,
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
will
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
believe
the
firm’s
greatest
risk
is
its
reliance
on
consumer
spending,
which
sees
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
“super
app.”
Still,
we
view
the
firm
as
defending
against
this
risk
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
heavily
depends
on
Foxconn
for
assembly
and
Taiwan
Semiconductor
Manufacturing
(TSM) for
chip
production.
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
that
government
officials
not
conduct
business
on
iPhones,
which
presents
a
current
and
potential
future
risk
to
Apple’s
sales
in
China.

Read
more
about
Apple’s
risk
and
uncertainty

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
has
accelerated
its
product
development
and
increased
its
differentiation.

Apple
has
a
stellar
balance
sheet
and
sends
a
great
deal
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
it
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.

This
article
was
compiled
by
Krutang
Desai

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