Slowing iPhone sales growth, concerns over China, and arguably pricey valuation metrics weren’t enough to stop Apple’s (AAPL) stock from soaring following its Q4 earnings results published last week.
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The Californian tech giant’s solid performance, particularly in its Services segment and positive market reception due to Apple’s AI strategy, drove the stock higher. However, tariff headwinds in China have since halted Apple’s bullish momentum. Although I’m a long-term Apple bull and recognize it as one of the companies with the strongest business fundamentals globally, I believe this is a moment to exercise caution with Apple stock.
There is a case to be made that the current tech rally is set for a correction and stocks like Apple could feel the worst of it, given its specific metrics.
In my view, there’s not enough to justify committing to a long position in Apple. The stock is trading at historically high valuations, growth isn’t exceptional, and headwinds are mounting. Until I see Apple demonstrating its ability to spark growth through new catalysts, I’m staying on the sidelines.
Strong Results Suggest AAPL Has Peaked
Overall, Apple’s consolidated results were solid, albeit uneventful, and left little room for investors to fault them. The Big Tech giant delivered another beat across the board, exceeding consensus EPS by 5 cents and revenues by $273 million, showing year-over-year growth of 10% and 3.9%, respectively.
On the top line, Apple reported total net sales increasing by $4.8 billion, with much of the solid revenue growth coming from the Services segment, which I see as great news for investors, considering that the segment is nearly twice as profitable as the Product segment.
On the bottom line, Apple’s gross profit margin jumped by $4 billion, which shows that the increase in top-line revenue has directly led to an increase in the company’s margins, as Apple has effectively managed costs in an increasingly complex environment for a company of its size.
Furthermore, when we look at EPS, Apple reported $2.40 in FYQ1, compared to $2.18 in the same period last year, showing increased profitability. Another essential factor is the company’s share repurchase program, with Apple spending $23.6 billion on quarterly buybacks. As the company buys back shares, EPS generally increases due to a smaller share count and higher earnings.
Chinese Roadblocks for Apple’s iPhone
One of the main reasons behind my more conservative take on Apple stock is the high negative impact Apple has experienced in China due to rising competition and declining iPhone sales. In FYQ1, Apple’s revenues in China fell by over $2.3 billion, from $20.8 billion to $18.5 billion. On the bright side for Apple investors, this part of AAPL’s business continues to shrink and become increasingly less relevant, contributing roughly 15% of Apple’s consolidated sales.
Another less-than-enthusiastic point was that iPhone sales were not increasing. Revenue came in at $69.1 billion, down from $69.7 billion, and the estimates coming into the quarter were that iPhone sales would be around $71 billion. So, this was a miss by about $2 billion in the most critical product for Apple and the gateway to Apple’s ecosystem.
Political Tensions and Tariffs Threaten Bullish AAPL Story
When it comes to China, the uncertainties don’t stop there. Political pressure is weighing even more heavily on Apple in China, especially with President Trump considering imposing 10% import tariffs on Chinese goods. It’s worth noting that, in Apple’s case, the company relies heavily on China for its supply chain, despite recent efforts in recent years to diversify via India and Vietnam.
During the Q4 earnings call, when asked about the impacts of these alleged tariffs imposed by President Trump, CEO Tim Cook replied that he has been monitoring the situation closely but had nothing to comment. While tariffs are a point of debate, the markets are divided on how they will affect large multinational firms in the short and long term. Trump’s tariffs could just be saber-rattling or the beginnings of a protracted trade war weighing on companies in both countries for years to come.
Apple’s Valuation is Pricey When Adjusted for Growth
Despite being one of the most generative companies in the world and reducing its dependence on the iPhone, Apple’s current valuation is still very pricey, especially when adjusting for growth.
Apple is trading at a forward 32x earnings, 14% higher than its five-year historical average. This can mainly concern a hardware-based company with lower margins than software peers. The main problem is that this multiple should match a company expected to grow EPS at 9.5% over the next three to five years, which is inconsistent with a robust growth stock.
Therefore, I am skeptical that the current dynamics may bring a more limited upside for Apple in the near term, especially in the immediate term, considering political headwinds. I think the upside will be limited until Apple can show more growth and muscular earnings potential—possibly driven by the upcoming iPhone AI supercycle and continued services expansion.
Is Apple a Buy, Sell, or Hold?
While Wall Street’s consensus on AAPL is somewhat mixed, with a Moderate Buy rating based on 18 Buy, ten Hold, and four Sell ratings over the past three months, several analysts have raised their price targets following the FYQ1 results. AAPL’s average price target currently stands at $251.60 per share, indicating a 10.7% upside potential from its current levels.
Limited Short-Term Upside for AAPL Despite Solid Earnings
Even with solid record earnings results in Q4 last year, I continue to rate Apple stock as a Hold. Given modest growth expectations, I struggle to see much upside ahead, especially compared to other growth companies in the tech space. Although pricey valuations somewhat justify a business with such quality and robust fundamentals, headwinds in China and iPhone sales are discouraging, at least in the short to medium term.
At 32x forward earnings, locking in gains here and exploring other opportunities might be wise, though holding could still make sense for those with a long-term view.
