Apple (NAS: AAPL) released its first-quarter fiscal earnings report on Jan. 30. Here’s Morningstar’s take on Apple’s earnings and stock.

Key Morningstar Metrics for Apple

  • Fair Value Estimate: $200.00
  • Morningstar Rating: ★★
  • Morningstar Economic Moat: Wide
  • Morningstar Uncertainty Rating: Medium

What we thought of Apple’s Q1 earnings

Apple’s December-quarter revenue rose by 4% year over year to $124.3 billion. iPhone revenue declined 1% year over year to $69.1 billion, and services revenue rose 14% year over year to $26.3 billion. March-quarter revenue guidance calls for low to mid-single-digit year-over-year growth.

Why it matters: The firm’s tepid results and guidance align with our expectations for a soft iPhone growth cycle over the next two years, with the integration of generative artificial intelligence features only modestly increasing device sales.

  • Apple Intelligence doesn’t appear to be lifting iPhone 16 unit sales in a material way. We point to a delayed and protracted rollout of features as reasons for a mild initial impact. In our view, the most attractive feature set of Apple Intelligence has still not been released.

  • China remained a growth headwind, with revenue declining for the sixth straight quarter. China is a key piece of our thesis for slowing long-term iPhone growth, with Apple losing share to revitalized domestic competitors

The bottom line: We maintain our $200 fair value estimate for wide-moat Apple. We believe our long-term thesis for slowing iPhone growth is bearing out. Despite our favorable view of the company and its fundamentals, we see Apple’s valuation implying overly rosy expectations for long-term growth.

  • iPhone revenue has grown at a 7% average annual rate in the past 10 years, but we believe through-cycle iPhone revenue growth is slowing and forecast 5% average annual growth through fiscal 2029. Core to our thesis are China headwinds and a mature smartphone market.

  • Shares rose 3% after-hours, which we see as an overreaction to March-quarter revenue guidance. In our view, low to mid-single-digit year-over-year growth represents a mild iPhone cycle and fails to justify the current valuation Apple holds today.
apple-stock-price

Figure 1: Apple Stock Price. Source: Morningstar Direct. Data as of Feb. 04, 2025.

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 $200 per share, which implies a fiscal 2025 adjusted price/earnings multiple of 27 times, an enterprise value/sales multiple of 7 times, and a free cash flow yield of 4%. Against our estimate of fiscal 2026 earnings, our valuation implies a price/earnings multiple of 23 times.

We project 7% compound annual revenue growth for Apple through fiscal 2029. 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 a mix shift toward the more premium Pro models.

Apple stock vs. Morningstar Fair Value estimate

apple-versus-fair-value

Figure 2: Apple price versus Fair Value. Source: Morningstar Direct. Data as of Feb. 04, 2025.

Economic moat rating

We assign Apple a wide economic 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 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 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. 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. 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 become cash-neutral, though 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 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 “super app.” We view the firm 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 (SHG: 601138) for its assembly and Taiwan Semiconductor Manufacturing (NYS: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 officials not conduct business on iPhones, which presents a current and potential future risk to sales in China.

Apple 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.

Apple bears say

  • Apple is prone to consumer spending and preferences, which creates cyclicality and makes the firm vulnerable to disruption.

  • Apple’s supply chain is highly concentrated in China and Taiwan, creating 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 Aman Dagra.

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Terms used in this article

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.

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.