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Apple (AAPL) remains in the headlines following the release of the Apple Intelligence-enhanced iPhone 16, which continues to generate significant buzz. Analysts have offered some mixed views on the company's recent performance, with Bank of America noting impressive growth in Apple's App Store, driven by surging entertainment app usage from platforms like YouTube and TikTok. However, JPMorgan downwardly revised its iPhone 16 unit estimates, lowering expectations for the December quarter to 76 million units from an earlier 80 million, due to "muted consumer demand."
While Apple's services growth remains robust, the slower-than-anticipated start of the iPhone 16 has raised concerns. Still, analysts remain optimistic overall about Apple’s long-term potential, with even JPMorgan backing its “Overweight” rating amid iPhone 16 caution. Ahead of a key holiday season for the tech device leader, here's a closer look at what's driving AAPL shares.
About Apple Stock
Apple (AAPL) stock has long been the gold standard in the tech sector, and with its massive $3.47 trillion market cap, surpasses giants like NVIDIA (NVDA) and Microsoft (MSFT) to hold the title of largest tech company in the world. Apple has a solid track record of innovation, from the iPhone to the Apple Watch, which has allowed the company to carve out its spot at the top of the intensely competitive sector. Indeed, Apple has delivered blockbuster returns over the past several years, thanks to its fiercely loyal customer base.
Drilling down on those returns, Apple has proven to be a great investment over the past decade, with a return of 740% during this period - compared to about 185% for the broader S&P 500 Index ($SPX).
Over the past 52 weeks, Apple stock has advanced 27%, and currently trades only about 5% away from its all-time high of $237.23, set in mid-July.
AAPL stock also offers a dividend yield of 0.44%, backed by 10 consecutive years of growth, and the company earlier this year announced a massive $110 billion buyback program.
In terms of valuation, Apple is trading at a 33.9x forward price-to-earnings (P/E) ratio, and 8.83x forward price-to-sales (P/S). The stock is priced at a premium, compared to the current tech sector median valuations, as well as its own 5-year averages; however, “Magnificent 7” rivals like Microsoft and Nvidia carry even steeper premiums right now, suggesting that AAPL isn't necessarily priced out of line with its closest peers.
Launch of iPhone 16: Hit or Miss?
On Sept. 20, Apple released its latest iPhone 16 series, with much of the focus centered around what the company bills as “Apple Intelligence” - its version of artificial intelligence (AI) software that assists in photo editing, text summarization, and more. However, this feature has not yet been fully released, but is being rolled out gradually.
Wall Street hoped that these AI capabilities would boost demand for iPhone sales, which have shown signs of flagging with more recent iterations - but these hopes are beginning to fade, as pre-sales have been slower than expected. Only 37 million units were sold in the first week of pre-sales, which is down by 12% compared to last year.
Overall, demand for the iPhone 16 appears lower than for the iPhone 15 at launch, with the delay in the release of the highly anticipated Apple Intelligence features cited by many as a factor. Despite these challenges, I believe sales will improve once the AI features are released.
T-Mobile (TMUS) CEO Mike Sievert noted a surge in iPhone 16 sales compared to last year's models, despite the delay in the launch of Apple Intelligence, and added that consumers are “buying up the food chain” in terms of device selection, as well. So, while the AI rollout delay might stretch out the upgrade period beyond the initial launch, the large number of older iPhones in use suggests Apple could ultimately be heading for a big win.
AAPL Profitability Remains Strong in Fiscal Q3
Apple has a long-standing reputation for delivering strong financial results, though slowing top-line growth has recently become a concern. However, in its fiscal Q3 report, revenue surpassed estimates to reach $85.8 billion, representing a 5% increase year-over-year. While iPhone revenue fell year over year, Services revenue remained a strong point, and iPad sales jumped amid the release of new models.
Software products like the App Store, Apple TV+, and iCloud also generated increased demand, accounting for 22% of total sales and rising 14% overall in Q3. These Services products boast a 74% gross margin. Overall, Apple enjoys a net margin of 25%, reflecting its efficiency in managing operating expenses effectively.
Apple reported a GAAP profit of $1.40 per share in Q3, exceeding analysts' estimates by 6 cents. Furthermore, Apple boasts a solid balance sheet, with adjusted free cash flow of $26.7 billion in Q3. These strong cash flows empower Apple to invest strategically, return value to shareholders, and navigate economic uncertainties confidently.
Looking ahead, Wall Street expects revenue of $390.51 billion for the fiscal year, with EPS forecasted to hit $6.70.
What Do Analysts Say About Apple Stock?
Earlier today, Jefferies analyst Edison Lee downgraded AAPL to “Hold” from “Buy,” arguing that the iPhone 16 is unlikely to meet Wall Street's expectations.
"We like Apple Intelligence [long-term], as AAPL is the only hardware-software integrated player that can leverage proprietary data to offer low-cost, personalized AI services," wrote Lee in a note accompanying the downgrade. "But smartphone hardware needs rework before being capable of serious AI, with likely timeline of 2026/27. The high expectations for iPhone 16/17 are premature, in our view."
The analyst has a price target of $205 for Apple stock, about 8.5% below the stock's current price.
Overall, Wall Street analysts remain moderately bullish on AAPL overall. Of the 31 analysts covering the stock, 18 give it a "strong buy" rating, 4 say it's a "moderate buy," 8 suggest a "hold," and only 1 recommends a "strong sell." The average price target of $246.11 implies about 10% upside potential.
The Bottom Line on Apple Stock
Apple remains a compelling long-term investment, with multiple catalysts poised to drive future growth. The full release of Apple Intelligence could still significantly boost sales over the coming months, potentially pushing the stock higher following its upcoming quarterly reports. However, more than any one device, Apple's ecosystem of services could be the stock's real advantage when it comes to customer loyalty and future revenue visibility.
On the date of publication, Nauman Khan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
