As We Boost Our Apple Price Target, Here's What Could Spur Us to Add More Shares
Let's break down the quarterly results, guidance and what to what watch going forward for this meaningful portfolio holding.
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Apple's AAPL December-quarter results, announced Thursday after the bell, confirmed the iPhone upgrade cycle is unfolding, reaffirmed the importance of Apple’s Services business and how one continues to feed the other. Continued growth in the Services business not only lessens the quarter-to-quarter performance of iPhone sales, as it becomes a larger part of Apple’s mix, it also helps lift Apple’s margins and brings a steadier base of EPS.
Following these results and the company's outlook for the current quarter, we are raising our price target for Apple shares to $270 from $250, and we expect to see others across Wall Street make similar moves.
The Results
Heading into last night’s earnings report there had been much speculation about iPhone sales, especially in China, even though third-party data from IDC showed global iPhone unit sales rose 33% sequentially in the December quarter. The same data showed a small decline in iPhone unit shipments compared to Q4 2023. As we saw in Apple’s report last night the shift to higher price Pro models led to a more modest year-over-year decline in iPhone revenue of just 1% compared to IDC’s unit shipment figures. That iPhone revenue decline for the December quarter was far better than some of the whisper figures across Wall Street.
That along with the double-digit revenue growth in Mac, iPad, and especially the higher margin Services revenue led Apple to deliver an all-time revenue high for the quarter. With the Services business continuing to grow as a percentage of overall revenue to 21% for the December quarter compared to 19% in the year-ago one, its 75% gross margin helped power Apple’s overall operating margin higher. This is a reminder that even though Wall Street is understandably focused on iPhone because it is Apple’s largest revenue generator (51% of total 2024 revenue), Services drives around 40% of Apple’s gross margin dollars. As Apple’s install base continues to grow and should it roll out new subscription offerings, we should see further gains in that high-margin Service revenue.
That doesn’t mean we can ignore iPhone. As we pointed out above, it remains Apple’s largest revenue driver. Management said the December quarter set an all-time high record for upgraders, and the install base hit a new all-time high as well. Sifting through the particulars, the company shared that performance was stronger in markets where Apple Intelligence was available.
That supports our view that as Apple continues to bring new Apple Intelligence features to its devices in the coming quarters, we should see an extended iPhone upgrade cycle emerge. In turn, that should drive Apple’s device install base and serve as fuel for further growth in the Services business. With that in mind, during last night’s earnings call, CEO Tim Cook said Apple Intelligence will be rolled out to the Indian market, which is the second-largest smartphone market, in April.
The Guidance
In terms of Apple’s outlook for the current quarter, Apple sees its overall revenue rising low-to-mid-single digits year over year, which implies the usual sequential drop we see moving from the December quarter to the March one. Factoring in management’s expectation for Services revenue to grow low-double-digits on a year-over-year basis, points to flat to a modest year-over-year decline in Apple’s Product revenue for the current quarter.
To gauge the prospects, particularly for iPhone, in the current quarter we will be closely watching comments and monthly revenue reports from Taiwan Semiconductor TSM and Foxconn as well as upcoming earnings and investor conference comments from others in the smartphone food chain. Qualcomm QCOM and Skyworks Solutions SWKS report next week. Timing for Apple’s expected refresh of the iPhone SE and further Apple Intelligence updates in coming iOS updates, including a big one for Siri targeted for early in the June quarter, are other potential catalysts on our watch list. They are also potential catalysts for our shares of Qualcomm and Universal Display OLED.
The silver lining to Apple’s March and June quarters is the higher-margin Services business should have a greater impact on margins and profit generation, which means overall gross margins should remain relatively stable. Should the iPhone upgrade cycle turn out to be faster than expected and continue to favor the shift to Pro products that carry higher margins, we could see better overall margins and EPS prospects than expected.
Our Plan
From the TheStreet Pro Portfolio's perspective, our position in Apple is a meaningful one and that means we will need to be selective when it comes to adding additional shares. That’s another reason for us to pay close attention to upcoming smartphone and upgrade-related data. At the same time, should we see market weakness pull Apple shares back near the $220 level that would offer us a favorable risk-to-reward trade-off in the shares. Subject to the driver behind such a move, it could also give us enough to revisit our Two rating.
At the time of publication, TheStreet Pro Portfolio was long AAPL, QCOM and OLED.
