Apple (AAPL) will report its fourth-quarter results after the closing bell on Thursday, October 31, aiming to maintain its recent bullish momentum. This time, however, I am more careful. While I remain an Apple bull for the longer term, analysts have increased their fourth-quarter estimates over the past three months, increasing pressure on the company to meet these higher expectations. As a result, I’m not sure now is the best time to buy, despite my long-term optimism.
In addition, the stock’s high valuation following the recent rally could further increase pressure for strong performance, leaving little room for any deviations from expectations. The narrative surrounding the AI ​​supercycle, which is still in its infancy, also adds a layer of short-term volatility.
While I’m taking a more cautious view of Apple stock ahead of its fourth-quarter earnings results, the prior quarter was quite strong, with the company beating expectations on both earnings and revenue. Apple reported earnings per share of $1.40, beating the consensus estimate of $1.34, and posted revenue of $85.8 billion, beating the forecast of $84.4 billion. This marked the sixth consecutive quarter in which the company exceeded earnings expectations, underscoring Apple’s consistent performance
Two key takeaways from the quarter were Apple’s performance in China and its approach to capital expenditure (CapEx). Firstly, despite a 6.5% year-on-year decline in sales in China, the results were better than expected, especially considering the iPhone has fallen from the top five in terms of market share, down from 16% a year ago to 14%.
Second, while many Big Tech companies have significantly increased their AI-related spending, Apple has taken a more conservative approach. The company is likely to maintain its capital expenditures between $10 billion and $11 billion annually. In fact, CapEx is down 28% over the last twelve months compared to the same period last year – well below the $50-$70 billion spent by some of its peers.
Apple’s conservative approach has resonated well in the market. Unlike its competitors, Apple’s AI strategy focuses on improving existing products to make more money from its massive user base, rather than building data centers. This prudent spending led to strong cash flow, with operating cash flow of $29 billion in the June quarter – a record. With $153 billion in cash and $101 billion in debt, Apple is well positioned to reward shareholders, returning more than $32.7 billion through share buybacks and a $0.25 dividend last quarter.
The services segment also deserves special attention, as it has clearly been the company’s main growth driver over the past three months. The segment generated $24 billion in revenue, up 14% year over year. This growth is especially significant when we look at margins: Services had a gross margin of 74%, compared to 35.3% for products. As Apple’s hardware base expands, Services revenues continue to reach new highs, increasing overall profitability.
Despite the strong momentum in AAPL stock, I remain neutral ahead of Apple’s Oct. 31 earnings report. Part of my concern lies in the optimism among analysts, with 21 of 26 raising earnings estimates in the past three months and 20 of 25 raising revenue forecasts.
To beat expectations, Apple needs to beat earnings per share of $1.59 (indicating 6% year-over-year growth) and report revenue above $94.33 billion, up 5%. However, analysts expect even more growth to occur in the coming quarters, increasing pressure on the company to deliver results.
Considering near-term stock prices, while the iPhone 16 and 16 Plus, both of which are capable of artificial intelligence (AI), should be the company’s next growth drivers, sales have been lackluster so far. Initial sales of 37 million units fell 12.7% below the iPhone 15’s launch numbers. However, a recent report shows that iPhone sales in China increased 20% in the first three weeks, offering a more positive outlook.
However, I believe it may be too early to make a deeper analysis as the full potential of the iPhone 16 may not be realized until more AI features become available, delaying any AI-driven super cycle .
In addition to the iPhone, I think performance in the Chinese region is very important. Over the past nine months, Apple has seen sales in China fall 9.6%, due to the ongoing struggle in the region, where it is rapidly losing market share to local competitors. Although the trend is that demand for the iPhone 16 will pick up again, major breakthroughs are unlikely to occur in the fourth quarter.
Perhaps the biggest reason for the market’s skepticism about Apple today is its valuation. While this premium is supported by the company’s high-end business, Apple remains heavily dependent on the iPhone, which accounted for more than 50% of total sales last year. On the other hand, the highly profitable Services segment, which benefits from an installed base of 2.2 billion devices, now accounts for almost a third of Apple’s revenue (28% in FQ3). This segment has strong margins and has been key to maintaining the valuation premium.
That said, analysts expect Apple’s fiscal 2024 earnings per share to grow just 9% year-over-year, with growth rates not exceeding 12% through fiscal 2026. Apple therefore trades at a price-to-earnings ratio of 35x, significantly higher than Apple’s price-to-earnings ratio. five-year average of about 24x. Even when adjusting for growth – with an expected CAGR of 9.4% over the next three to five years – the resulting PEG ratio of 3.7x is almost 50% above the historical average and almost three times higher than Nvidia (NVDA), making this multiple increasingly difficult to justify.
While long-term investors may not be too concerned, given Apple’s exceptional cash generation and strong returns on capital, this valuation could add to near-term volatility, especially as the market focuses on short-term outcomes in a rapidly evolving AI -controlled environment. .
At TipRanks, the Wall Street consensus on AAPL is a Moderate Buy, consisting of 23 Buys, 10 Holds, and one Sell. The average price target is $248.34, implying an upside potential of 8.16%.
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I have a Hold rating on Apple ahead of its upcoming earnings results, reflecting a cautious outlook due to Wall Street’s high confidence in beating expectations during what is expected to be a low-growth quarter. The impact of the AI ​​supercycle is likely to become more apparent in the 2025 fiscal year.
Additionally, keep an eye on stronger-than-expected numbers from China as they could be critical for the region. That said, stretched valuations add an extra layer of caution, leaving little room for setbacks.
