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apple (AAPL -0.84%) Wedbush Securities remains a top tech stock despite the alarming performance of its China business. Analyst Dan Ives dismissed such concerns as noise, recently saying that Apple will become the first $4 trillion company by the end of 2024. This forecast implies a 40% upside from the company’s current market cap of $2.85 trillion.
Ives provided additional comments in a note to customers: “Approximately 240 million iPhones worldwide are currently in the process of upgrading to iPhone 15, and service is once again accelerating.” [fiscal year 2024], we see this as a great opportunity to own Apple next year. ”
Here’s what investors need to know.
Apple spooks investors with declining sales and weak outlook in China
Apple reported better-than-expected financial results for the first quarter of fiscal 2024, ending December 30, 2023. Revenue increased 2% to $119.5 billion due to slightly higher iPhone sales and stronger service revenue growth. Management highlighted that advertising, video and cloud services are contributing significantly to its momentum.
Apple earns higher profit margins on services than on hardware, so as its services business has expanded, its profitability has also improved over time. This trend continued in the first quarter. Gross margin expanded 290 basis points and GAAP earnings increased 16% to $2.18 per diluted share. Share buybacks also contributed to the rapid growth in earnings.
The chart below provides a more detailed look at Apple’s revenue growth in the first quarter.
Graph by author. Shown above is Apple’s revenue across all his five business segments for the first quarter of fiscal year 2024 (ending December 30, 2023).
Despite the strong financial results, Apple stock fell about 4% on the news for two reasons. First, sales in China have fallen 13%, raising concerns that the company is losing market share to domestic competitors such as Huawei and Xiaomi. jeffries Analysts estimate that iPhone sales in China fell by 30% in the first week of 2024. This is a pressing concern since China is Apple’s third largest market, accounting for one-sixth of its total revenue.
Second, although Apple did not provide formal guidance, management hinted that second-quarter revenue would be down about 5%. CFO Luca Maestri said the weak outlook was due to the lack of specific tailwinds. Specifically, Apple benefited from pent-up demand for iPhones in the second quarter of last year, as factory closures had previously limited production.
Apple is a consumer electronics leader with growth opportunities in services
Apple has a strong presence in several areas of the consumer electronics market. Leadership in the smartphone space (as measured by revenue and unit shipments) is the foundation of the company’s business. But the tech giant also holds a dominant position in the tablet and smartwatch markets, and is one of the largest personal computer vendors. Its success is built on brand authority and engineering expertise.
Specifically, Apple combines premium hardware (including custom chips) with proprietary software and services to create a compelling user experience. The iPhone is the center of that ecosystem, but adjacent products like the Mac and AirPods make it more stable. These attributes give Apple significant pricing power. According to Insider Intelligence, the average iPhone costs twice as much as the average Android smartphone.
This pricing power allows Apple to invest heavily in research and development. The company recently launched its first mixed reality device, Apple Vision Pro, which some experts believe will eventually replace the iPad.
Apple’s installed base exceeded 2.2 billion devices in the first quarter. The company aims to monetize these consumers once during their first purchase, but then continue to monetize them through service businesses. For example, Apple derives service revenue from App Store fees and related advertising, iCloud storage, financial products such as Apple Pay, and other subscription products.
The company has strong positions in several of these categories. The Apple App Store leads the mobile application market in terms of revenue. Apple is her fifth fastest growing digital advertising company in the United States. Apple Pay is the most popular in-store mobile wallet among U.S. consumers.
Apple stock trades at a premium valuation compared to big tech companies
To create shareholder value, Apple must maintain its strong position in smartphones and continue to grow its services business. The company also needs to stay abreast of nascent technologies such as virtual reality and augmented reality. Products incorporating these technologies could become the next big thing in consumer electronics. If Apple falls behind, it could be replaced in the same way that the iPhone replaced American products. nokia and blackberries.
Whether Apple reaches $4 trillion in 2024 is a coin toss. An investor interested in purchasing stocks should plan to hold the stocks for at least 3 to 5 years. Personally, I doubt Apple will be able to achieve above-market profits during that period. The company’s current valuation of 29x earnings looks expensive compared to the 9.4% annualized long-term earnings growth expected by Wall Street.
Adding these values together gives Apple a PEG ratio of 3.1. For context, alphabet PEG ratio is 1.5, Amazon The PEG ratio is 2.3; microsoft The PEG ratio is 2.5. That means Apple’s prices are higher than the big tech companies.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Trevor Jennewine has a position at his Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Jefferies Financial Group, and Microsoft. The Motley Fool recommends his BlackBerry and recommends the following options: His January 2026 $395 long call on Microsoft and his January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
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