Key Morningstar metrics for Apple

  • Fair Value Estimate: $185
  • Morningstar Rating: 2 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium

What we thought of Apple’s earnings

We raised our fair value estimate for Apple (ASX: AAPL) to $185 per share from $170. Our higher valuation reflects our raised expectations for longer-term iPhone growth, inclusive of what we expect to be a strong year of growth in fiscal 2025, spurred by the introduction of generative AI functionality on the newest iPhones.

Apple continues to face growth headwinds in China, with ramped-up domestic smartphone alternatives weighing on sales.

Services revenue is firmly the firm’s second-largest driver (behind the iPhone) and is growing in the double digits in fiscal 2024, which we view positively.

Despite our bullish expectations for a strong iPhone upgrade cycle in fiscal 2025, we continue to see shares as overvalued. We believe investors would need to assume close to 20% iPhone growth in fiscal 2025 to justify Apple’s current share price, compared with our expectations of closer to 10%.

Apple share price

Fair value estimate for Apple stock

With its 2-star rating, we believe Apple’s stock is overvalued compared with our long-term fair value estimate of $185 per share.

Our fair value estimate for Apple is $185 per share. Our valuation implies a fiscal 2024 adjusted price/earnings multiple of 28 times, a fiscal 2024 enterprise value/sales multiple of 7 times, and a fiscal 2024 free cash flow yield of 4%.

We project 7% compound annual revenue growth for Apple through fiscal 2028. The iPhone will be the greatest contributor to revenue over our forecast, and we project 6% 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 iPhone Pro models.

Apple fair value

Economic Moat Rating

We assign Apple a wide economic moat rating, stemming from customer switching costs, intangible assets, and a network effect. In our view, Apple’s iOS ecosystem extends far-reaching, sticky tendrils into customers’ wallets, entrenching customers 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 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 vast ecosystem of developer partners. These moat sources elicit great profitability and returns on invested capital. In our view, Apple can leverage these moat sources into continued economic profits over the next 20 years, more likely than not.

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. Apple has a terrific balance sheet, with a net cash position of $51 billion as of September 2023. Management has laid out a goal to become cash-neutral eventually, with no set timetable. We don’t anticipate it hitting this target in the next five years but to progress toward it. Since announcing the goal in 2018, Apple has reduced its net cash position by more than half, from over $100 billion.

Risk and uncertainty

We assign Apple with a Medium Uncertainty Rating. We see the firm’s greatest risk as its reliance on consumer spending, for which there is 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 “superapp.” We view the firm defending against this risk, however, 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.

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 think has accelerated its product development and increased its differentiation.
  • Apple has a stellar balance sheet and sends great amounts of cash flow back to shareholders.

AAPL bears say

  • Apple is prone to consumer spending and preferences, which creates cyclicality and opens the firm up to disruption.
  • Apple’s supply chain is highly concentrated in China and Taiwan, which opens up the firm 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 Apple’s sticky ecosystem.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.