Apple Earnings: Our Valuation Rises to Reflect Stronger Long-Term Growth, but Less of an AI Impact

Despite improved outlook, Apple stock looks overvalued.

William Kerwin 1 November, 2024 | 9:34AM
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Key Morningstar Metrics for Apple

Fair Value Estimate: $200
Morningstar Rating: 2 stars
Morningstar Uncertainty Rating: Medium
Economic Moat: Wide

What We Thought of Apple’s Earnings

We raise our fair value estimate for wide-moat Apple AAPL to $200 from $185 as we raise our longer-term growth expectations. We’ve also revised down our short-term forecast for iPhone revenue to reflect less of an impact from artificial intelligence on unit sales over the next two years. We believe Apple Intelligence will spur a return to mid-single-digit growth for iPhone revenue, but we believe the impact will be drawn out over the next two fiscal years. In the longer term, we expect iPhone unit sales and Apple’s services segment to drive solid growth and for margin expansion to help drive double-digit earnings growth over the next five years.

Nevertheless, we find shares overvalued. We believe iPhone revenue growth, Apple’s largest driver, is slowing throughout cycles in a mature smartphone market and with growth headwinds out of China. We expect only a moderate slowdown in good growth, but we believe the expectations priced into the stock are lofty and reflect the overexuberance surrounding AI.

September-quarter revenue rose 6% year over year and 11% sequentially, in line with our expectations. IPhone revenue rose 6% year over year, which reflects a positive inflection and which we attribute in part to excitement around the iPhone 16 lineup, which had 10 days of sales in the quarter. Services remained Apple’s highest growth area, rising 12% year over year. These combined to make up 75% of revenue.

Lowering iPhone Revenue Forecast

December-quarter revenue guidance was below our expectations, with management expecting low to mid-singledigit year-over-year growth. We’ve lowered our iPhone revenue forecast for fiscal 2025 to reflect a slower ramp in iPhone 16 unit sales. We believe the release of Apple Intelligence will drive consumers to buy new iPhones. Still, a staggered release schedule will dampen what we previously expected to be a surge in demand in fiscal 2025. We forecast stronger growth in fiscal 2026 behind a more developed and widely available AI offering.

The September-quarter earnings call was the last with outgoing CFO Luca Maestri, who announced his departure in August. Maestri will occupy a smaller executive role at Apple as part of a planned succession. Kevan Parekh, current vice president of financial planning and analysis, will step into the CFO position. We don’t anticipate significant changes to Apple’s financial management or capital allocation and we maintain our Exemplary Capital Allocation Rating for the firm. We believe Maestri did a tremendous job as CFO, overseeing significant margin expansion and reductions in Apple’s ample net cash position. We expect a continuation of these efforts under Parekh.


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William Kerwin  is an equity analyst for technology at Morningstar

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