Comprehensive Analysis of Apple Inc and Peers – November 2024

Broker Name: OCBC Investment Research

Date: 4 November 2024

Apple Inc: Riding the Wave of Apple Intelligence Amid Uncertain Chinese Demand

Apple Inc. remains a dominant force in the consumer electronics industry, showcasing a robust ecosystem of integrated hardware, software, and services. This analysis dives deep into Apple’s latest financial performance, upcoming technological advancements, and market challenges.

Healthy 4QFY24 Performance

Apple’s 4QFY24 results are promising, with revenue hitting approximately USD 94.9 billion, marking a 6% year-on-year (YoY) increase. Operating profit soared by 10% YoY to USD 29.6 billion. However, earnings per share (EPS) experienced a 34% YoY decline to USD 0.97, largely due to a one-time charge from the reversal of the European General Court’s State Aid decision. Excluding this charge, EPS would have been USD 1.64, reflecting a 12% YoY rise.

Apple Intelligence: The Next Frontier

Apple recently introduced its first set of Apple Intelligence features, which include system-wide writing tools, a more conversational Siri, and a smarter Photos app. Additional features, slated for a December release, will enhance writing tools, introduce a new visual intelligence experience, and integrate ChatGPT. The positive feedback from developers and customers highlights Apple’s potential to revolutionize user interaction further.

Challenges in China

Despite robust global performance, Apple faces persistent softness in China’s demand. Revenue from China stood at approximately USD 15 billion, a slight 0.3% YoY decline, underscoring ongoing consumer demand weakness. Given China’s significant contribution to Apple’s overall revenue, this slow recovery poses a risk to future sales. Additionally, uncertainties surrounding the US election and potential Chinese stimulus measures further cloud the outlook.

Financial Projections

Looking ahead, Apple’s revenue is projected to grow from USD 391 billion in FY24 to USD 454.9 billion by FY26. Operating profit is expected to reach USD 145.9 billion in FY26, up from USD 123.2 billion in FY24. Net income is forecasted to rise from USD 93.7 billion in FY24 to USD 123.3 billion in FY26, with diluted EPS increasing from USD 6.1 in FY24 to USD 8.6 in FY26.

Valuation Metrics

Apple’s valuation metrics for FY25 and FY26 show promising trends. The Price/Earnings (P/E) ratio is expected to be 30.0 and 26.8 respectively. Enterprise Value/Sales (EV/Sales) ratios are projected to be 8.2 for FY25 and 7.6 for FY26. The company’s Return on Equity (ROE) is anticipated to remain high, at 182.6% for FY25 and 174.8% for FY26.

Environmental, Social, and Governance (ESG) Updates

Apple’s ESG rating remained unchanged in December 2023. The company’s reliance on outsourced production poses risks of labor issues within its supply chain. However, Apple excels in managing end-of-life electronics recycling, sourcing 20% of its materials from recycled sources in 2022. Despite strong privacy measures, data security concerns persist.

Peer Analysis: Alphabet Inc, Microsoft Corp, and Meta Platforms Inc

Alphabet Inc (GOOGL.O)

Alphabet Inc, the parent company of Google, continues to showcase strong financial health. For FY25, Alphabet’s P/E ratio is expected to be 21.4, decreasing to 19.2 in FY26. EV/Sales ratios are projected at 5.8 and 5.2 for FY25 and FY26, respectively. The company’s ROE is anticipated to be 32.4% in FY25 and 30.2% in FY26. With a focus on innovation and expanding its digital advertising dominance, Alphabet remains a formidable competitor.

Microsoft Corp (MSFT.O)

Microsoft Corp, a leader in software and cloud services, is expected to maintain robust growth. The P/E ratio for FY25 is projected at 31.6, decreasing to 27.3 in FY26. Similarly, EV/Sales ratios are estimated to be 10.9 for FY25 and 9.6 for FY26. Microsoft’s ROE is expected to be 33.2% in FY25 and 28.7% in FY26. The company’s focus on cloud computing and enterprise solutions positions it well for sustained growth.

Meta Platforms Inc (META.O)

Meta Platforms Inc, formerly Facebook, continues to dominate the social media space. For FY25, Meta’s P/E ratio is projected at 25.4, reducing to 22.5 in FY26. The company’s EV/Sales ratios are anticipated to be 8.5 for FY25 and 7.5 for FY26. Meta’s ROE is expected to be 33.7% in FY25 and 30.3% in FY26. With ongoing investments in the Metaverse and augmented reality, Meta aims to expand its digital ecosystem.

Conclusion

Apple Inc and its peers Alphabet, Microsoft, and Meta Platforms continue to exhibit strong financial health and innovative capabilities. While challenges persist, particularly for Apple in the Chinese market, their strategic initiatives and robust ecosystems position them well for future growth. Investors should closely monitor these companies’ performance, especially with the upcoming technological advancements and market dynamics.