Apple reported its highly anticipated Q4 earnings last month, surpassing both top- and bottom-line expectations. However, the company’s guidance for the current quarter has raised concerns.

The strong performance in Q4 was driven primarily by the iPhone, which accounted for 49% of revenue, and the Services segment, contributing 26% of total revenue. However, Apple’s outlook for the upcoming quarter, which projects low-to-mid single-digit revenue growth, fell short of market expectations. Further complicating matters, Apple refrained from providing detailed breakdowns of how its various business segments align to support its revenue forecast. The company did mention that it expects its higher-margin Services business to grow at a double-digit rate, with targeted gross margins of 46% – 47%.

During the earnings call, management did not provide additional insights regarding the prospects for iPhone sales in the current quarter. Based on the guidance, it seems likely that Apple’s product revenue will either remain flat or see modest growth in Q1 2025.

The company’s cautious stance appears to be tied to its outlook for the iPhone upgrade cycle. Comments on the recent iOS 18.1 release, which introduced early Apple Intelligence features, suggest a more conservative view on immediate iPhone upgrades. The market is likely awaiting iOS 18.2, which will include more advanced Apple Intelligence features, such as ChatGPT integration. This upcoming software update, expected in late November or early December, could spark a more significant upgrade cycle for iPhone 15 and iPhone 16 models. Thus, Apple’s cautious guidance comes as no surprise given the timing of this key software update.

As the iPhone remains Apple’s largest revenue driver, the market will continue to focus on its performance in the coming months and into 2025. However, given the timing of iOS 18.2, which includes a more comprehensive rollout of Apple Intelligence features, the anticipated upgrade cycle is likely to be reflected into 2025 earnings.

The upcoming update is expected to benefit not only the iPhone but also other key Apple product categories, including Mac, iPad, and Wearables. As more software updates are rolled out across these devices, the Services business is likely to experience continued growth, further enhancing Apple’s overall profitability and EPS.

Despite the cautious guidance, Apple’s earnings report has not altered the long-term positive prospects of the company. Apple must deliver compelling new features with Apple Intelligence, and the true test will come with the release of iOS 18.2. While we are optimistic about Apple’s success, we will await concrete data points following the software update to gauge market response.

Over the past five years, Apple has delivered a steady compound annual revenue growth rate (CAGR) of 8%, a testament to its ability to maintain relevance and drive consumer demand across its product lines. Its balance sheet remains one of the strongest in the industry, with a debt-to-equity ratio of less than 1.87, highlighting its disciplined approach to financial management.

Valuation metrics, including a price-to-earnings (P/E) ratio of 40x trailing earnings and 33x forward earnings (as of the 10th of December 2024), underscore a premium pricing reflective of Apple’s robust market position. However, these multiples are considered lofty, raising concerns about whether the company’s growth trajectory can sustain such valuations.

Apple remains committed to delivering high-quality products and exceptional user experiences, with a particular focus on middle- to upper-income consumer segments. Its business strategy emphasizes cost control and operational efficiency to sustain strong profit margins, while maintaining dominance in key markets such as smartphones, tablets, and wearables. By leveraging its ecosystem, Apple fosters repeat purchases and enhances customer retention through lock-in effects.

The iPhone remains the flagship product, contributing over $46 billion revenue in the latest quarter. The services segment is a rapidly growing division, now representing approximately 25% of total revenue. This includes the App Store, Apple Pay, iCloud, AppleCare, and digital content subscriptions, providing a high-margin and recurring revenue stream. Complementary segments, such as Mac computers, iPads, Apple Watch, and AirPods, further diversify revenue streams and reinforce the ecosystem.

The iPhone 16th series symbolizes Apple’s success but also highlights the challenges of a mature product. Incremental updates of existing products rather than groundbreaking innovation now drive sales, which is less lucrative than pioneering groundbreaking devices and technology. Today, upgrade cycles contribute more significantly to Apple’s bottom line than bold innovation – a notable shift from earlier years.

The company also faces a growing challenge due to its heavy reliance on China – both as a production hub and a major consumer market. The iPhone remains the cornerstone of Apple’s business, with many of its other products and services designed to complement and integrate seamlessly with it. Supply chain disruptions, trade tensions, and shifts in consumer sentiment could impact the company’s bottom line.

Apple’s services segment has emerged as a key growth engine, generating $25 billion in revenue during Q4 2024. While this is a milestone, the more critical factor is the recurring revenue nature of this segment, which is a big chunk of Apple’s overall gross profit.

This division encompasses a range of offerings, including high-margin revenues driven by app sales and licensing fees, platforms like Apple Music, Apple TV+, and Fitness+ catering to a growing base of loyal customers, and essential tools like Apple Pay and iCloud that further embed users into the Apple ecosystem. By expanding its services portfolio, Apple mitigates the cyclicality associated with hardware sales, creating a more stable and predictable revenue base.

The expansion of the Services business, fueled by both product sales and new service offerings, reduces Apple’s reliance on iPhone sales and provides more stable profit and earnings per share (EPS) growth.

Apple continues to focus on expanding its presence in international markets, particularly in emerging economies. Offering installment payment plans has made its premium products more accessible to price-sensitive consumers. This strategy has been instrumental in driving growth across Europe and China, and Apple now aims to deepen its footprint in regions like Southeast Asia, India, and Latin America.

Apple Inc., with a market capitalization of $3.4 trillion, stands as a technological and cultural icon. Its blend of cutting-edge hardware, software, and services has reshaped personal communication, entertainment, and business productivity. Functioning as a self-sustaining ecosystem, Apple has become deeply entrenched in the daily lives of its customers. However, after decades of extraordinary success, the question arises: where is Apple’s stock price headed as it transitions into a more mature phase of its lifecycle?

Apple is likely to feel the effects of the potential significant policy changes that could emerge under the presidency of Donald Trump. The new administration’s focus on tariffs, reshoring manufacturing, and reducing reliance on global supply chains poses challenges for a globally integrated company like Apple. How the company will adapt remains uncertain, but its operational scale and established industry leadership may provide a buffer but will require strategic adjustments to go through these changes successfully.

According to Yahoo Finance analysts project $415 billion in revenue for fiscal 2025. Earnings per share (EPS) are expected to rise from $6.08 in 2024 to $7.40 (+21%) in 2025 and $8.25 (+11%) in 2026.

Source: TradingView

Year-to-date, Apple’s stock delivered a 33% return, outperforming the S&P 500 (+28%) and Nasdaq 100 (+30%). As the largest constituent of both indices, representing over 8% of the Nasdaq 100 and around 6% of the S&P 500, Apple’s performance is closely tied to the inflows and outflows to index funds that track these benchmarks.

This outperformance relative to the broader market, demonstrates that Apple’s stock remains a cornerstone for institutional and retail portfolios alike, bolstered by its brand reputation and perceived stability.

Apple’s stock has traded within a range of $196 to $237 over the past 5 months. Last week’s price action decisively broke above its key resistance of $237 suggesting that a new impulsive wave has started, which is critical to maintain the current positive momentum.

The Relative Strength Index (RSI) is firmly in the bull market range, showing that internal momentum conditions are strong. The bullish price breakout, coupled with robust momentum indicators, point to likely higher prices over the medium-term. The potential upside target based on the technical breakout is in the range between $260 and $280. Given the current strongly overbought momentum readings and lofty valuation, we see better value in the stock should the share price find its way to $230. Nonetheless, the long-term technical and macro backdrop is compelling and the outlook for 2025 is bullish, which is likely to propel prices higher in the coming months.

Apple remains a world-class business with a robust balance sheet, unparalleled brand loyalty, and a well-entrenched ecosystem. However, its high valuation, slower growth outlook, and reliance on mature product lines warrant caution. While Apple’s dominance is unlikely to wane, its ability to meet Wall Street’s high expectations will determine its stock price trajectory in the coming year.

Professional investors looking for magnified exposure to Apple may consider Leverage Shares +3x Long Apple or -3x Short Apple ETPs.