AAPL Earnings Preview: iPhone sales face scrutiny as valuation pressures mount

Apple's upcoming Q4 earnings report is anticipated with EPS expectations of $1.58 and revenue forecasts of around $94 billion. Key performance metrics to watch include iPhone sales, especially with the recent iPhone 16 series launch, and Apple Intelligence features expected to bolster demand in the near future. Analyst estimates for iPhone unit sales suggest around 51 million, with mixed reviews indicating both strong performance in China and a more subdued demand in other regions.

The iPhone, which remains Apple’s flagship product, faces headwinds as U.S. cell provider upgrades slow and Chinese market challenges persist, although the iPhone 16’s initial Chinese market performance was positive with a 20% sales increase over the previous model. Apple Intelligence, integrated in the latest devices, may be an enticing feature but is not expected to drive immediate sales growth; rather, analysts believe it will support a stronger FY25. Investors are particularly focused on iPhone growth prospects, given the projection of mid-single-digit growth for FY24, with bullish analysts targeting higher long-term growth rates.

Apple’s high-margin services sector, an increasingly significant revenue source, is also a focal point, with expectations of mid-teens growth in Q4. As iPhone sales decelerate, services revenue – which includes Apple Music, iCloud, and Apple Pay – provides a stable income stream, reflecting Apple’s pivot towards recurring revenue models. Despite the anticipated growth, services are not immune to regulatory headwinds in both the EU and U.S., which may affect future outlooks if regulations tighten.

In terms of expenses, Apple faces mounting costs tied to AI infrastructure, which could pressure margins slightly in Q4. Despite this, Apple's gross margin is expected to remain robust, with a forecast of approximately 45.5%, thanks to efficiency in the services segment and ongoing operational improvements. This approach has allowed Apple to maintain profitability even as competitive pressures in its hardware segment, particularly VR and AR through the Vision Pro, intensify.

The company has maintained a steady stock repurchase program, with significant buybacks likely in Q4, underscoring its strong cash position and shareholder-focused capital strategy. Apple’s cash reserves also provide flexibility in managing rising CapEx, which is set to support AI, cloud services, and hardware innovation through 2025. Shareholders are watching for any increase in repurchase activity, as buybacks have historically provided substantial support for the stock.

Q1 guidance is likely to set the tone for Apple’s holiday quarter, traditionally a peak season for iPhone sales and consumer electronics. Analysts anticipate Apple to guide revenue growth between 6-7% for Q1 FY25, balancing iPhone demand uncertainties with strong services revenue. A focus on Apple’s gross margin guidance will be crucial, especially as higher BOM costs for the iPhone 16 could slightly impact profitability next quarter.

Competitive pressures are becoming more pronounced, as Apple’s Vision Pro faces stiff competition from Meta’s VR offerings, which are less costly but heavily subsidized. Additionally, Apple's valuation has sparked discussions among analysts due to its elevated P/E ratio relative to historical norms, posing a potential risk if Q4 results fall short. This premium valuation reflects high investor expectations, particularly around Apple’s ability to monetize new AI capabilities and support the next leg of its growth story.

Apple’s challenges in driving consistent iPhone growth have led to concerns over valuation, particularly given high expectations priced into the stock. Analysts suggest a potential correction if YoY iPhone revenue declines more than anticipated, especially as market sentiment shifts from hardware to software-based growth models. Investors remain cautiously optimistic, looking for clear guidance on iPhone momentum and AI-driven revenue streams to support Apple’s valuation.

In summary, Apple’s Q4 earnings report will focus on balancing iPhone demand with robust services growth, while its new AI and product innovations begin to shape long-term growth strategies. With strong cash reserves and steady shareholder returns, Apple’s guidance on future growth will be critical in sustaining its high valuation and meeting investor expectations in an increasingly competitive tech landscape.