Date: 23 September 2024
Broker: OCBC Investment Research
Strong FY3Q24 Performance
Apple Inc. reported strong financial results for FY3Q24, ending June 2024, which exceeded market expectations. The company posted revenue of USD 85.8 billion, surpassing consensus estimates of USD 84.5 billion. This represents a 5% year-on-year (YoY) increase. Operating profit also grew by 10% YoY, reaching USD 25.4 billion, beating consensus projections of USD 24.6 billion. Additionally, Apple achieved an earnings per share (EPS) of USD 1.40, a notable 11% YoY growth, against the consensus of USD 1.35.
Growth in Services and Device Base
Apple’s services division continued to demonstrate strong growth, achieving an all-time record revenue of USD 24.2 billion, reflecting a 14% increase YoY. This growth was driven by robust sales in advertising, cloud services, and payment systems. Furthermore, Apple’s installed base of active devices reached a new all-time high, laying a solid foundation for future ecosystem expansion.
Challenges in China
Despite the strong overall performance, Apple remains cautious about its outlook in China due to ongoing macroeconomic challenges. Weakness in the Chinese economy could negatively impact Apple’s financial performance in the near term, particularly given the company’s dependence on the region for both supply chain operations and consumer demand.
Apple Intelligence and AI Potential
Apple introduced “Apple Intelligence” during its 2024 Worldwide Developers Conference, showcasing AI capabilities designed to simplify and accelerate everyday tasks while maintaining user privacy. These AI features, which include advancements in language understanding, image processing, and deeper Siri integration, are expected to drive potential future device upgrades. However, these features will only be available on the latest iPhone lineup, limiting their short-term impact.
Muted Near-Term Impact of AI Offerings
While Apple’s AI offerings have generated excitement, the report highlights that their impact on sales is likely to be muted in the near term. The staggered rollout of these features—some of which may not be available until late 2024 or 2025—combined with uncertainties around consumer adoption, suggests that the replacement cycle may be slower than expected. In addition, competitive pressures and regulatory concerns in China and the EU could limit the geographic reach of Apple’s AI products.
Valuation and Growth Projections
OCBC Investment Research forecasts Apple’s revenue to grow by 1.9% in FY24 and 7.8% in FY25. Gross profit margins are expected to increase to 45.7% in FY24 and 46% in FY25, largely due to higher revenue contributions from the services division. EPS growth is projected at 9.4% for FY24 and 13.1% for FY25.
Apple’s current valuation appears stretched, with the stock trading at a forward 12-month GAAP price-to-earnings (P/E) ratio of 30.8x, which is approximately 1.6 standard deviations above its historical 10-year average forward GAAP P/E of 19.8x. OCBC sets a fair value estimate for Apple at USD 228, based on a 30x GAAP P/E multiple applied to FY25 estimated revenue.
ESG Concerns
Apple’s environmental, social, and governance (ESG) rating remained unchanged as of December 2023. Key risks identified include Apple’s reliance on outsourced production, which exposes it to potential controversies related to labor conditions in its supply chain. Despite these challenges, Apple has strong audit mechanisms in place. Additionally, the company leads its peers in electronics recycling, with 20% of the materials used in its products in 2022 sourced from recycled materials.
Data security remains a significant concern, especially given the sensitive nature of personal information stored in Apple’s mobile applications. Although Apple adheres to “Privacy by Design” principles, there are ongoing concerns regarding data breaches, surveillance, and authentication risks.
Conclusion
OCBC Investment Research has maintained a “Hold” rating on Apple Inc., with a fair value estimate of USD 228, reflecting cautious optimism for the company’s future performance amidst potential macroeconomic challenges and a measured rollout of its AI initiatives.
