Apple (AAPL) is set to report its Fiscal Q4 earnings on Thursday, October 31, after the closing bell, aiming to maintain its recent bullish momentum. However, I’m more cautious this time. While I remain a long-term Apple bull, analysts have raised their estimates for FQ4 over the past three months, adding pressure on the company to meet these heightened expectations. As a result, I’m uncertain if now is the best time to buy, despite my long-term optimism.
In addition to this, the stock’s stretched valuation after its recent rally could further increase the pressure for strong performance, leaving little room for any slip-ups in guidance. The narrative surrounding the AI supercycle, still in its early stages, also adds a layer of short-term volatility.
Although I have a more cautious outlook on Apple stock ahead of its FQ4 earnings, the previous quarter was quite strong, with the company exceeding expectations on both earnings and revenue. Apple reported an EPS of $1.40, beating the consensus estimate of $1.34, and posted revenues of $85.8 billion, surpassing the $84.4 billion forecast. This marked the sixth consecutive quarter that the firm exceeded earnings estimates, highlighting Apple’s consistent performance
Two key takeaways from the quarter were Apple’s performance in China and its approach to capital expenditures (CapEx). First, despite a 6.5% year-over-year decline in China sales, the results were better than expected, especially given that the iPhone dropped out of the top five in market share, slipping to 14% from 16% a year ago.
Second, while many Big Tech companies have been significantly increasing their AI-related spending, Apple has taken a more conservative approach. The company is likely to maintain its CapEx in the $10–$11 billion range annually. In fact, over the past twelve months, CapEx has decreased by 28% compared to the same period last year—far below the $50–$70 billion being spent by some of its peers.
Apple’s conservative approach has resonated well with the market. Unlike its peers, Apple’s AI strategy focuses on improving existing products to better monetize its vast user base rather than building data centers. This cautious spending led to strong cash flow, with $29 billion in operating cash flow in the June quarter—a record. With $153 billion in cash and $101 billion in debt, Apple is well-positioned to reward shareholders, returning over $32.7 billion last quarter through share buybacks and a $0.25 dividend.
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, a 14% increase year-over-year. This growth is particularly significant when considering the margins: Services had a 74% gross margin compared to 35.3% for products. As Apple’s hardware base expands, Services revenue continues to hit new highs, boosting overall profitability.
Despite the strong momentum in AAPL shares, I remain neutral ahead of Apple’s October 31 earnings report. Part of my concern lies in the optimism among analysts, with 21 out of 26 raising EPS estimates and 20 out of 25 boosting revenue projections over the past three months.
To beat expectations, Apple must surpass an EPS of $1.59—indicating 6% year-over-year growth—and report revenues above $94.33 billion, a 5% increase. However, analysts expect the following quarters to see even more growth, which adds pressure on the company to deliver results.
Considering short-term stock movements, while the iPhone 16 and 16 Plus, both capable of running artificial intelligence (AI), should be the company’s next growth drivers, so far, sales have been lackluster. Initial sales of 37 million units fell 12.7% below the iPhone 15’s launch figures. However, a recent report showed that iPhone sales in China have surged 20% in the first three weeks, offering a more positive outlook.
I believe, however, that it may still be too early to make any deeper analysis, considering that the full potential of the iPhone 16 may not be realized until more AI features become available, delaying any AI-driven super cycle.
Beyond the iPhone, I see performance in the China region as quite important. In the last nine months, Apple has seen sales in China fall by 9.6%, reflecting the ongoing struggles in the region, where it is rapidly losing market share to local competitors. Although the trend is that the iPhone 16 demand should pick up again, there likely won’t be any major breakthroughs in the fourth quarter.
The primary reason for market skepticism about Apple today is, arguably, its valuation. While this premium is supported by the company’s high-quality business, Apple remains heavily reliant on the iPhone, which made up over 50% of total revenue last year. On the other hand, the highly profitable Services segment, benefiting from an installed base of 2.2 billion devices, now accounts for nearly one-third of Apple’s revenue (28% in FQ3). This segment boasts strong margins and has been essential in sustaining the valuation premium.
That said, analysts expect Apple’s Fiscal 2024 EPS to grow by only 9% year-over-year, with growth rates not exceeding 12% through Fiscal 2026. Consequently, Apple trades at a forward P/E ratio of 35x, significantly higher than its five-year average of around 24x. Even when adjusting for growth—with a projected CAGR of 9.4% over the next three to five years—the resulting PEG ratio of 3.7x is nearly 50% above its historical average and almost three times higher than Nvidia’s (NVDA), making this multiple increasingly difficult to justify.
While long-term investors may not be overly concerned, given Apple’s exceptional cash generation and strong returns on capital, this valuation could contribute to short-term volatility, particularly as the market focuses on near-term results in a rapidly evolving AI-driven 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 a 8.16% upside potential ahead.
I have a Hold rating on Apple ahead of its upcoming earnings, reflecting a cautious outlook due to Wall Street’s high confidence in beating estimates during what is expected to be a low-growth quarter. The impact of the AI supercycle is likely to become clearer in Fiscal 2025.
Additionally, keep an eye on stronger-than-expected numbers from China, as they could be pivotal for the region. That said, stretched valuations add an extra layer of caution, leaving little room for setbacks.
