We're Lowering Our Apple Price Target After Earnings. Here's Why.
Let's break down the company's earnings results, dividend hike and guidance as the Services segment continues to bring stability and visibility.
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Last night Apple AAPL reported its March-quarter results, with EPS eking out a better-than-expected $1.65 compared to the $1.62 consensus. Lest one thinks the 108 million shares the company repurchased during the quarter for $25 billion spurred that EPS beat, it was delivered by the combination of better-than-expected revenue and year-over-year gains in operating income.
While Apple’s Product revenue was down sequentially, following the typical seasonal pattern, it was up low-single digits year over year with gains in iPhone, Mac, iPad, and Apple Watch, and management sharing the install base for each of those categories hit all-time highs. iPhone continued to benefit from the recent introduction of new models and the expanded rollout of Apple Intelligence. On the earnings call, management commented that based on inventory channel levels, it has not seen any meaningful signs of product pull forward for its products.
However, with Product operating income relatively flattish compared to year-ago levels, the profit "juice" in the quarter can be traced to the Services segment, which grew to 28% of overall revenue in the quarter compared to 26% in the year-ago one. We suspected that would be the case, given the significant margin difference between the two segments but it was even more pronounced as Services gross margins hit a recent high of just under 76%, almost a full point higher compared to the December quarter.
Exiting the quarter, Apple had more than 1 billion paid subscriptions and record-high install bases among key hardware categories suggests the Services segment will remain a key driver of Apple’s profit picture in the quarters ahead. We like that visibility as well as stability. It tends to get lost in the shuffle that, depending on the quarter, Services now contributes between 40%-45% of Apple’s gross profit dollars.
All told, we would characterize Apple’s March quarter as a good one, which was made even more palatable with a 4% increase in the quarterly dividend to $0.26 per share and the additional $100 billion added to its share repurchase program. Adding that fresh buyback injection to the $40.8 billion remaining under Apple’s existing program exiting March brings it to a staggering figure.
The company’s new dividend is payable on May 15 to shareholders of record as of the close of business on May 12, and in reviewing Apple’s 10-Q for the quarter we find the company “intends to increase its dividend on an annual basis.” So while we like the buyback increase, we like that line about the dividend even more.
Guidance
Turning to Apple’s June-quarter guidance, it sees total revenue rising in the low-to mid-single digits year-over-year, which implies we will see a sequential downtick in revenue like we have in the past. Typically, the June quarter is the low point for iPhone sales as it’s after the late September quarter introduction of its new models and the new ones coming a few months out.
During the earnings call, CEO Tim Cook said that the majority of iPhones sold in the U.S. will have India as their country of origin and Vietnam will be the country of origin for almost all iPad, Mac, Apple Watch, and AirPods products sold in the U.S. China would continue to be the country of origin for the vast majority of total product sales outside the U.S.
Despite those moves, tariffs are estimated to add $900 million to costs in the June quarter, assuming no changes in global tariff rates and policies. That will weigh on the company’s gross margins, which are expected to come in between 45.5%-46.5% compared to 47% in the March quarter.
We expect that to impact Product margins more than Services margins, but as Apple continues to invest with operating expenses matching their March-quarter levels, we should expect to see operating margins trend lower. More than likely we will see that translate into Wall Street trimming EPS expectations for the June quarter and the second half of 2025.
As we think about that and reflect on our opening comments from today, meaningful progress on trade talks could lead to a re-think of H2 2025 expectations for Apple.
Lowering Our Price Target
Reflecting all of this, as well as tariff uncertainty, we are joining others in dialing back our Apple price target back to $235 from $270. That same tariff uncertainty overhang will likely keep AAPL shares restrained near-term and that is another reason for us to maintain our Two rating.
As clarity on the trade front comes, we will revisit what that means for Apple and monitor other companies in the smartphone, PC, and connected device supply chain for signs of device demand. With that in mind, we will be keenly interested in Taiwan Semiconductor's TSM April revenue report.
At the time of publictaion, TheStreet Pro Portfolio was long AAPL.
