So far in 2024, due to numerous challenges, Apple's (AAPL.US) stock price has continued to fluctuate, even giving up the title of the world's highest market capitalization to Microsoft (MSFT.US). Apple's weak performance in the Chinese market in the first quarter further exacerbated the company's current difficulties. However, in fact, Apple's latest quarterly earnings report was not so bad. If investors carefully analyze the company's financial metrics, they will find that the stock may be undervalued.
Last week, Apple announced its first quarter financial report for fiscal year 2024. After the financial report was released, Apple's stock price fell by about 4% due to a 13% decline in sales in the Chinese market and weak iPhone sales. Still, Apple beat expectations on both revenue and earnings per share.
equipment
By business, iPhone sales increased by 5.97% year-on-year, and Mac sales increased by 0.58%. At the same time, iPad sales fell sharply by 25.2%. According to Statista, the revenue of the global smartphone market is expected to grow at a compound annual growth rate of 3.53% by 2028.
Wearables, home and accessories business
In the first quarter, revenue from the wearable devices, home and accessories business fell 11.31% year-on-year. However, looking at the full fiscal year 2023, the business is down 3%, similar to iPhone and iPad declines of 2% and 3% respectively. This shows that the vast majority of Apple consumers will choose to purchase related accessories directly from Apple. Therefore, the business is expected to achieve the same growth rate as the equipment business.
Service business
The services business is a major growth potential for Apple, which has achieved impressive growth of 11% since the same period last year. This business can be divided into applications, repairs and ApplePay, of which the largest contributor is the AppStore. Statista predicts that the global application market revenue will grow at a compound annual growth rate of 8.58%.
Broken down, it is estimated that consumers will spend $86.8 billion on the App Store in 2022. Apple charges about 30% for apps and in-app purchases, so it can be estimated that AppStore revenue in 2022 will be about $26 billion. If the App Store is calculated at a compound annual growth rate of 8.58%, the service's revenue may reach approximately US$28.2 billion in 2023.
For other apps, some sources estimate Apple's revenue could be around $26.5 billion. If calculated at a compound annual growth rate of 8.58%, in 2023, in addition to the $28.2 billion created by the App Store, Apple may also achieve approximately $33.9 billion in revenue.
ApplePay. Some sources estimate the business's revenue in 2022 at approximately $1.9 billion. According to Statista estimates, the U.S. financial technology market will grow at a compound annual growth rate of 16.46%. According to this, Apple’s payment services revenue in 2023 may be approximately US$2.2 billion.
There are also repair services provided by Apple. Statista estimates that the consumer electronics repair market is expected to grow at a rate of 2.5%. It is speculated that AppleCare's revenue in 2021 will be approximately US$8.5 billion; therefore, based on comprehensive calculation, Apple's AppleCare revenue in 2023 may be US$8.93 billion.
Finally, based on the above calculations and the total service business revenue of $85.2 billion, Apple’s revenue from repair services can be concluded to be $12 billion.
Since 2018, Apple's revenue has maintained an annual growth rate of 7.5%. Operating profit grew at an annual rate of 11.2%. At the same time, net profit has been the fastest growing indicator, with a growth rate of 11.6%.
On a quarterly basis, Apple's Q1 revenue increased by 0.65% month-on-month, while operating profit surged by 3.76%. Net profit showed strong growth, reaching 4.12%, exceeding the other two indicators.
Profit margins also improved significantly. Operating profit margin increased to 30.76% from 29.82% in the previous quarter, while net profit margin increased from 25.31% to 26.16%.
Apple's debt load has also fallen significantly. Currently, Apple's total debt has been reduced to $123.93 billion. In comparison, cash reserves increased to $73.1 billion.
Additionally, free cash flow improved. Currently, the company's free cash flow is $93.27 billion. FCF margin increased to 24.2%. The improvement was attributed to higher operating cash ($116.43 billion) and lower capital expenditures ($9.56 billion).
According to current analyst consensus expectations, Apple's earnings per share are expected to grow in the mid-single digits throughout 2026. However, growth in 2027 is expected to reach 23.51%, followed by a more modest growth of 11.72%.
Revenue expectations do not reflect such high growth rates. Revenue is expected to grow at a mid-single-digit rate throughout 2028, with the only exception being 2027, where revenue is expected to grow 8.34%.
But based on analysts' expectations for Apple, the stock is significantly undervalued. Based on the above analysis and related calculations, Apple's fair price should be $276.29, which means there is 48.6% upside potential from the current stock price. Meanwhile, future share prices (assuming the metrics that make up the stock continue on the same trends observed from 2018 to 2024) should be around $401.14, which translates to an annual return of 19.5%. (Note: After 2025, the revenue growth rate is 2.04% and the earnings per share growth rate is 9.63%.)
If we take the available market trends for the segments in which Apple products belong as a basis, that is, sales of devices are expected to grow at a rate of 3.53%, sales of applications will grow by 8.58%, sales of repairs and AppleCare will grow by 2.5%, sales of Apple Pay services will grow by 16.46%, and sales of accessories will grow by the same 3.5% as sales of devices, a more optimistic result can be obtained.
Calculations show that Apple’s fair price is approximately $300.73, which represents a 61.8% upside from the current stock price. Additionally, the model suggests that the stock should be worth $439.27 by 2029, representing an annual return of 22.7%.
Still, Apple faces numerous risks: potential declines in iPhone, Mac and iPad sales, which could pose a major challenge to Apple's position. In this case, Apple will face two choices: either further innovation or immediate price cuts. However, the price cuts could damage Apple's reputation as a well-known brand. Furthermore, licensing iOS is not an advantageous option because it would eliminate the iPhone's competitive advantage in the operating system.
Second, Apple also faces market pessimism about its prospects. Currently, many analysts have given Apple a "sell" and "hold" rating.
However, if a comprehensive analysis of Apple's financial performance and market trends is used as a basis, the technology giant's prospects are still promising.
Despite certain risks, Apple's unwavering commitment to innovation and strategic resiliency have enabled it to maintain continued growth and market leadership in an evolving technology landscape. If Apple can continue to maintain its technological advantage, I believe the company will quickly reverse its recent decline.