Will Apple’s Q3 Results Get An AI Bump?

Apple (NASDAQ:AAPL) is expected to publish its Q3 FY’24 results on August 1, reporting on a quarter that is likely to see the company’s business improve, driven by higher Mac, services, and iPhone sales. We expect revenue to come in at $84.3 billion, up about 10% year-over-year, while earnings are likely to come in at $1.35 per share, about 13% ahead of last year’s number. Both our estimates are slightly ahead of the consensus. See our analysis of Apple Earnings Preview for a closer look at what to expect when Apple publishes its Q3 results.

Apple’s iPhone business could see modest growth this quarter, driven by emerging markets such as India. According to estimates from IDC, Apple shipped 45.2 million iPhones in Q2, up 1.5% year-over-year, although its overall smartphone market share declined a bit. Moreover, Apple could also benefit from a more favorable product mix, helping average selling prices of its iPhones. However, the iPhone has been facing headwinds in China, one of its largest markets, and the company has been resorting to discounts to prop up sales and better compete with the likes of Huawei, who has been gaining ground in the high-end of the market. Apple’s Mac business could fare well over FY Q3 as demand recovers following a post-Covid slump. According to IDC, Apple’s shipments rose 20.8% year-over-year, outpacing the broader PC market which rose by about 3%.  Apple’s digital services business should also fare well, driven by higher sales at the AppStore and improving the uptake of other subscription services. Over Q2 FY’24, services sales grew 14% to $23.9 billion. Although Apple has seen its gross margins rise in recent years, driven by a favorable sales mix skewed toward premium products as well as higher services sales and we expect this trend to continue over Q3 as well.

Separately, the launch of Apple’s new generative AI software – which includes upgrades to its Siri voice assistant, writing assistance tools, calculators, and image processing tools – could also begin to drive an upgrade cycle for the company. Apple is only offering the new AI tools, dubbed Apple Intelligence, on its higher-end devices to begin with. This is likely because many of the features require higher-power processing capabilities and use more on-device computing. For instance, the new AI assistant will only run on iPads and Macs with M1 and later chips. The only iPhones that will support the AI tools are the iPhone 15 Pro and Pro Max, which are equipped with the A17 Pro chip. For perspective, the cheapest iPads that support Apple AI cost about $600, which the number jumps to $1000 for the iPhone Pro. While we think it’s very likely that Apple will bring AI to more new devices in future product launch cycles, it’s safe to assume that the vast majority of Apple consumers, especially iPhone users, will need to upgrade devices to get access to the full suite of AI capabilities.

AAPL stock has seen extremely strong gains of 75% from levels of $130 in early January 2021 to around $230 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period.
However, the increase in AAPL stock has been far from consistent. Returns for the stock were 35% in 2021, -26% in 2022, and 49% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that AAPL underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Information Technology sector including MSFT, NVDA, and ORCL, and even for the mega-cap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AAPL face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

We value Apple at about $202 per share, which is about 12% below the current market price. Apple stock trades at about 34x FY’24 earnings, which is elevated compared to historical levels. However, Apple should see revenue growth pick up from the next fiscal year, driven by the introduction of new generative AI offerings and its upcoming iPhones, which could see more substantial updates. Margins are also likely to pick up, driven by a more favorable product mix skewed toward high-end devices, higher digital service sales, and lower component costs. See our analysis of Apple Valuation for more details on what’s driving our price estimate for Apple and how it compares with peers.

[1] Returns as of 7/18/2024
[2] Cumulative total returns since the end of 2016

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