As consumer electronics giant Apple (AAPL) prepares to release its Fiscal fourth-quarter earnings in two weeks, the conversation about the stock has reached a critical point. Personally, I think that while the company’s investment thesis remains compelling, especially after a robust Fiscal third quarter, and recent launch of the iPhone 16, the question of valuation persists. Apple seems to be positioned to post another solid quarter of results. Yet, I hold a neutral stance on the stock. At its current valuation, the debate is less about whether Apple will continue to successfully execute and more about how much of that success is already factored into the share price, which is highlighted in the chart below.
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Apple’s Growth Remains Robust
As mentioned, I’m neutral on AAPL stock. But to get a clearer picture of where Apple is headed, let’s first unpack its previous Fiscal Q3 results. In its most recent quarter, the company posted revenues of $85.8 billion, up 5% from the prior year. This growth was mainly driven by its services division, which continues to be a powerful engine for profitability. Services hit a record $24.2 billion, highlighting the increasing importance of subscription-based products like iCloud, Apple Music, and Apple TV+. I think that Apple’s strength here lies in its ability to diversify cash flow streams while maintaining dominance in its core hardware markets.
What really stood out to me in Fiscal Q3 was Apple’s steady performance across all of its main product lines. Take iPhone revenues for instance. While down slightly from the previous year, they still clocked in at a hefty $39.3 billion. At the same time, Mac and iPad sales rose, with the iPad posting 24% year-over-year growth. This revival in hardware sales, as well as the lasting service revenue expansion, gives Apple solid momentum heading into its upcoming Q4 print.
Lastly, I think it’s worth remembering that in Fiscal Q3, management highlighted Apple’s commitment to artificial intelligence (AI) and machine learning, or “Apple Intelligence.” As an iPhone user, seeing Apple’s presentation gave me confidence that the company is on the right track in this space. Global advancements in AI have been impressive but have had limited impact on the users. Apple seems to be the first company to integrate user-friendly AI features seamlessly into the iOS ecosystem, which is already familiar to its user base and can drive swift adoption. This should propel demand for the iPhone 16 and, therefore, Apple’s upcoming Fiscal Q4 results.
Impact of Apple’s iPhone 16
While I remain personally neutral on AAPL stock, there’s no questions that the recent launch of the iPhone 16 should be a key driver moving forward. So far, it seems that the iPhone 16 and 16 Pro, released in late September, were met with solid demand, particularly for the higher-end Pro models. Early reports indicate that while the standard models have seen soft uptake, the Pro models are hitting their sales targets, with no signs of supply chain cutbacks. This is excellent news for Apple, especially as it enters the holiday season, which has historically been a strong period for iPhone sales.
In line with the broader performance of Apple’s products, Wall Street expects Apple to post Q4 revenue of $94.21 billion, up 5.3% year-over-year. Also, EPS is projected at $1.58, a 5.8% increase from last year’s result. These forecasts seem solid and would mark a re-acceleration phase for Apple after the company’s 1% revenue decline in Fiscal Q4 of 2023. That said, I believe that much of this optimism is already priced into the stock at current levels.
Is AAPL Stock a Buy Before Q4 Results?
Neutral or not on Apple stock, a key question that needs to be answered is: Should you buy the company’s shares before its coming Q4 results? Well, given Apple’s year-to-date results and Wall Street’s forecast for Fiscal Q4, full-year consensus EPS estimates come in at $6.69. This implies that Apple is trading at roughly 34 times this year’s expected earnings. I believe this is a hefty multiple. I certainly understand investors’ desire to park their money in an industry leader, particularly one as reliable as Apple. Yet, Apple trades at a premium to all other mega cap technology stocks, many of which trade at lower multiples and are growing at faster rates.
Even if the iPhone 16 leads to another super cycle in smartphone purchases, I think that Apple’s valuation implies that much of this growth is already factored into the share price. In addition, the fact that Warren Buffett’s Berkshire Hathaway ($BRK.B) recently sold around half of its Apple stake should concern investors about the stock’s current valuation. Apple remains Buffett’s largest holding, so that doesn’t mean he is bearish. Still, the massive sale of Apple stock does signal that Buffett had comes concerns about the stock, and likely its valuation.
That’s why, even though I see Apple as a top-tier company and I’m glad to have exposure to it through ETFs, I wouldn’t buy the stock on its own at current multiples—especially before the Q4 results.
Is AAPL Stock a Buy?
Despite the stock’s rich valuation, Wall Street remains relatively bullish on Apple. Currently, AAPL stock has a Moderate Buy consensus rating based on 23 Buys, 10 Holds, and one Sell assigned in the past three months. At $248.90, the average AAPL price target indicates 7.90% upside potential.
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Read more analyst ratings on AAPL stock
Conclusion
In conclusion, while Apple’s growth engine appears to be intact, especially given the momentum from Fiscal Q3 and the positive launch of the iPhone 16, I believe its current valuation is a concern. The company is well-positioned for another robust quarter, but much of its potential success is likely already priced into the stock. Considering its premium valuation relative to other mega cap technology stocks, I am neutral on AAPL and would hesitate to buy shares before Q4 earnings are released.
