Apple Earnings: iPhone Sales Impress, but China Slowdown Weighs on Stock Price

Quarterly iPhone revenue and gross margin exceeded our expectations, but 2024 will see a weaker adoption cycle.

William Kerwin 2 February, 2024 | 9:53AM
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Key Morningstar Metrics for Apple

  • Fair Value Estimate: US$160.00
  • Morningstar Rating: 2 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium

What We Thought of Apple’s Earnings

We maintain our US$160 fair value estimate for shares of wide-moat Apple AAPL as we lower our short-term revenue forecast but raise our expectations for profitability. Apple’s December quarter iPhone revenue and gross margin exceeded our expectations. Still, we believe the iPhone will see a softer adoption cycle this year and lower our fiscal 2024 forecast for iPhone revenue to a modest decline. Apple is also facing revenue headwinds in China. In the short term, we see demand headwinds for Apple relating to elongating personal device replacement cycles and more aggressive domestic alternatives in China. In the long term, we maintain our view that Apple can drive growth from its unique combination of hardware, software, and services that also elicits steep customer switching costs and underpins our wide moat rating. Apple shares went about 3% lower following the results, likely because of weaker China results and lower iPhone expectations, but we continue to see the stock as overvalued.

December-quarter revenue rose 2% year over year to $119.6 billion. Growth was led by iPhone and Apple’s services, up 6% and 11% year over year, respectively. We think that iPhone growth represents a solid uptake of the new iPhone 15 lineup, and we believe there is an ongoing mix shift toward the more premium Pro models that benefit revenue. Within services, we believe Apple saw broad-based growth, including from rising App Store revenue. The firm’s wearables segment declined 11% year over year, likely because of patent issues with Apple’s Watch lineup that temporarily took the newest line of products off shelves in the quarter.

A gross margin of 45.9% was impressive and driven by record gross margins for both products and services. Expansion likely came from mix shifts toward more premium iPhone models and strength in high-margin portions of the services business like the App Store and Apple’s search agreement with Google.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Apple Inc207.49 USD-1.04Rating

About Author

William Kerwin  

is an equity analyst on the technology team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar Inc. He covers the IT supply chain, hardware, and semiconductor stocks.

Before joining the firm full-time in 2019, Kerwin was an intern on Morningstar's basic materials team.

Kerwin holds a Bachelor of Science in economics with a math emphasis and French from the University of Wisconsin-Madison. He also holds the Chartered Financial Analyst® designation.

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