Apple

Apple's June-quarter results were strong, highlighted by total revenue rising 16% year over year to $109.4 billion and 22% year-over-year growth in iPhone revenue. September guidance is weighed down by a combination of supply constraints, memory inflation, and foreign exchange headwinds.

Why it matters: The iPhone 17 continues to benefit from immense demand, as does the MacBook Neo. We expect supply constraints and memory inflation to weigh on results through 2027, but we expect Apple's recent pricing increases to help mitigate the impact. We model a growth headwind of about 3% in the September quarter and fiscal 2027 from supply constraints, primarily due to tight global chip supply amid demand for artificial intelligence. Demand remains strong, and we still expect Apple to grow nicely despite these constraints. Adjusting for tariff refunds, product gross margin dipped 230 basis points sequentially in June due to memory inflation, and we expect another 250-basis-point dip in September. We expect pricing to limit the impact of memory beyond September, but still model a 200-basis-point headwind in 2027.

The bottom line: We trim our fair value estimate for wide-moat Apple to $285 from $290 to reflect short-term supply constraints and memory cost pressures. Shares are down 7% in the aftermarket, but remain lightly overvalued to us. We still expect double-digit growth in 2027, led by pricing increases. June prices rose by 15% to 25%, and there may be another hike in the fall with new products. These help to partially offset memory inflation, while Apple shares some of the pain on gross margin. In 2028, we expect relief to both supply constraints and profitability via expanding supply, particularly for memory. Longer-term, we believe Apple's price increases can benefit margins once memory prices come back to earth.

While supply constraints are certainly weighing on growth, we note that the September-quarter guidance of 10% year-over-year growth at the midpoint remains robust for Apple, despite decelerating from superb year-to-date levels. Without supply constraints, we estimate Apple might have seen 25% growth in iPhone revenue in fiscal 2026, reflecting tremendous demand. In 2027, we expect demand to remain healthy, but shipments to be muted by supply constraints, with total revenue growth led by pricing.

We view pricing increases as a net positive for Apple, given that demand for its products is relatively inelastic. We also remind investors that between 2020 and 2024, Apple's inflation-adjusted real prices came down as much as 20%. To us, these price increases are permanent and intended as a one-time move to account for expected memory inflation through 2027. Still, we could see higher prices for iPhone models (expected to be released in September) if they offer higher memory capacity to support further AI applications. A bearish scenario would be memory prices remaining elevated into and beyond 2028, further hampering gross margins and forcing Apple to implement additional price increases that could eat into demand.

Investors have been bullish on Apple recently, with the firm reaching an all-time high in July, in part due to AI optimism. We come in more measured on AI's impact on Apple's fundamentals. The primary way for AI to benefit Apple is by driving consumers to buy new devices more quickly than before, thereby improving growth. The bull case is that Apple develops a killer suite of AI applications that require more and more memory each year, leading consumers to buy new devices to use the latest AI features. Our base-case assumption is that the iPhone 16 and 17 families already have higher memory content to run many AI features, thereby muting a potential unit-sales growth cycle from new features. Additionally, while we like Apple's revamped AI strategy announced in June, it remains to be seen whether the features are compelling enough to prompt consumers to upgrade devices more quickly. We like Apple's AI strategy, focused on integrating securely into personal data on-device, but the features remain well behind AI's leading-edge from a raw capability standpoint.

Finally, this earnings report was Tim Cook's last as CEO. John Ternus will step into the role on Sept. 1 and lead the September-quarter earnings call. We reiterate liking Ternus as a successor. We like putting a product-oriented background in charge as Apple navigates a new era of AI-led devices. We expect broad continuity in strategy and in capital allocation with Kevan Parekh remaining CFO. But will look forward to any hints of strategy tweaks when Ternus takes the reins.

Our fair value estimate for Apple is $285 per share. Our valuation implies a fiscal 2026 price/earnings multiple of 32 times, a fiscal 2026 enterprise value/revenue multiple of 8 times, and a fiscal 2026 free cash flow yield of 3%.

We project 9% compound annual revenue growth for Apple through fiscal 2030. The iPhone will be the most significant contributor to revenue over our forecast, and we project 10% growth in iPhone revenue over the next five years, including superb growth above 20% in fiscal 2026, double-digit pricing-led growth in 2027, and mid-single-digit growth longer-term. We attribute robust growth in fiscal 2026 to strong uptake of the iPhone 17 family, especially in China, and a pent-up refresh cycle from covid-era purchases five years prior. We expect long-term growth to be primarily unit-sales-driven, but 2027 marks a step change in pricing in response to memory cost inflation. Thereafter, we anticipate Apple will hold prices steady (as it did between 2020 and 2024) and focus on unit growth.

Services are Apple’s next biggest revenue contributor over our forecast, and we forecast more than 10% services revenue growth over the next five years. Services are driven in large part by revenue from Google for its status as the default search engine in Safari, as well as by Apple’s cut of App Store revenue. We expect solid growth in Google revenue, but see a more mixed outlook for App Store results, where we forecast growth in overall app revenue but gradually lower cuts going to Apple later in the decade as a result of regulatory pressures to return more profits to developers. Elsewhere, we see mostly double-digit growth across revenue from Apple Music, Apple TV+, Apple Pay, AppleCare, and Apple’s other services.

We see mid-single-digit growth for Apple’s wearables business through fiscal 2030. We see mid-single-digit growth for Apple Watch and AirPods revenue, with both products continuing to gain share. We expect double-digit growth for Apple’s Vision Pro, but it will remain a small minority of total revenue and a niche product in its current form. We project roughly $2 billion in Vision Pro revenue in fiscal 2030.

Across Apple’s other primary hardware products, Mac and iPad, we see midcycle growth in the low to mid-single digits. We expect Mac to see stronger short-term revenue from a cyclical rebound in consumer PC spending, as well as strong uptake for the lower-priced MacBook Neo.

We forecast gross margins to rise past 50% in fiscal 2030, up from 47% in fiscal 2025. We believe Apple can see margin expansion from a higher mix of higher-margin hardware, like iPhone Pro models, and services. We also expect Apple to continue using R&D to both maintain pricing power and trim costs. R&D helps Apple develop new features, especially by creating more cost-efficient semiconductors and bringing more chip development in-house. In the short term, we see modest margin pressure from rising memory prices, but expect Apple to continue to navigate these well and maintain healthy margins. We believe that pushing base-level iPhone storage capacities higher gives Apple a margin cushion, and we see it adept at pressuring its supply chain to secure supply on favorable terms. Still, if memory cost inflation lingers on past 2028, there is downside to our profit forecast.

Operating margins rise with gross margins in our forecast, reaching 36% in fiscal 2030 from 32% in fiscal 2025. We anticipate strong growth in research and development expenditures, which are key to Apple’s value and moat. We observe robust R&D growth in fiscal 2026, which we think is ramping up Apple’s internal investments in AI and AI-centric devices for the future. We think the firm can eke out modest leverage on other operating expenses, but anticipate higher short-term costs as Apple pivots some manufacturing out of China and invests in AI models.

We assign Apple a wide economic moat, stemming from customer switching costs, intangible assets, and a network effect. In our view, Apple’s iOS ecosystem extends far-reaching, sticky tendrils into customers’ wallets, entrenching customers with software capabilities and integration across disparate devices such as the iPhone, Mac, iPad, Apple Watch, and more. We also see immense design prowess at Apple, most impressively in the deep integration of hardware, software, and semiconductors to create best-in-breed products. Finally, we see a virtuous cycle between Apple’s affluent customer base and vast ecosystem of developer partners. These moat sources elicit great profitability and returns on invested capital. In our view, Apple can leverage these moat sources into continued economic profits over the next 20 years, more likely than not.

For us, Apple’s most important moat source is the switching costs of its software ecosystem, driven by iOS on the iPhone. Apple enjoys terrific customer retention and satisfaction, even though it prices its products at a significant premium over the competition. First, Apple offers software capabilities that are only available to iPhone users, iMessage, Apple Pay, and location sharing. Apple’s products become even more entrenched when a customer adopts two or more of them. Users who combine the iPhone with a Mac, an iPad, and/or an Apple Watch are offered more features, which in turn create a higher cost of switching.

In our view, Apple’s ability to widen its portfolio of user devices augments its existing switching costs. The Apple Watch and AirPods are good recent examples of new products we see raising stickiness of customers. A Watch user must have an iPhone to use it. AirPods connect with marked ease to Apple devices but have to be manually repaired each use if joined to a non-Apple device. As customers use more point devices, we believe they are less likely to leave Apple’s ecosystem.

We see Apple’s adept ability to introduce and succeed with new form factors (like smartwatches and VR headsets) as defending the firm from disruption risk. After Apple itself disrupted the mobile phone market by creating the modern smartphone, we believe it is critical for the firm to stay on the cutting edge and stave off disruptive threats to its own portfolio. We believe developing auxiliary products integrated with the iPhone is doing just that.

We also believe Apple’s design expertise constitutes significant intangible assets that enable the firm to deliver top-tier performance across its devices' hardware, software, and semiconductors. We see an enormous research and development budget enabling and maintaining this design prowess.

Apple boasts impressive semiconductor design capabilities that augment the performance of its iPhone, Mac, iPad, and Watch offerings. By designing its own chips, Apple can customize its devices for performance, power efficiency, and available features. Its chips for iPhone and Mac and iPad all emphasize power efficiency for best-in-class battery life and security, tailored to Apple products.

By owning its chip design, Apple tightens the integration between its hardware devices and its sticky software ecosystem. Apple’s custom chip families allow for common platforms across devices and new software features that further rope in customers. We believe the common platform across chips for iPhone, Mac, iPad, and Watch also aids third-party app developers to create more integrated experiences for customers, which leads to more apps designed for Apple devices, more features across third-party apps, and a stickier proposition for customers, in our view.

Apple’s chip capabilities are bolstered by a robust relationship with Taiwan Semiconductor. In our view, this relationship enables Apple to pursue more powerful and more efficient chips ahead of its competitors. Apple’s iPhone is typically the first product to feature the newest process technology from TSMC, and Apple pays TSMC for dedicated capacity, guaranteeing a supply to meet demand for new iPhones, Macs, and the like.

Apple’s chip design and software design prowess work in tandem. We believe the firm stands to benefit from quicker time-to-market for new features across both hardware and software by developing the two together. This compares with using generic chips from the likes of Intel and relying on another firm’s development for its own software ambitions. This integrated approach also stands out against Apple’s primary smartphone competitor, Samsung, which owns its hardware assembly but outsources its chips and software to Qualcomm and Google (Android), respectively. Apple focuses on the premium end of its markets, and customers have shown a consistent desire to pay up for this performance, generating unit market share gains for Apple even as its prices rise compared with competitors.

Apple’s moat is reinforced with a network effect between its large, committed user base and expansive developer ecosystem. We believe that more talented developers are drawn to Apple’s large install base, while consumers are drawn to the wide selection of applications on Apple’s App Store. In our view, this is accentuated by a richer base of Apple users that spend more on apps and generate more developer profits. We also think that Apple’s unified software ecosystem across iPhone, Mac, iPad, Watch, and more is an attractive proposition for developers, compared with designing disparate interfaces for an Android phone and Windows PC.

Apple’s ability to deliver cutting-edge products with tightly integrated hardware and software, along with its software ecosystem’s ability to lock in customers, results in impressive profit margins. Apple’s asset-light model with outsourced manufacturing also generates robust returns on invested capital. In our view, Apple’s sticky ecosystem and phenomenal engineering capabilities will enable it to continue earning strong economic profits over the next 20 years.

Apple offers an expansive ecosystem of tightly integrated hardware, software, and services that locks in customers and drives strong profitability.

We like Apple’s move to in-house chip development, which we think has accelerated its product development and increased its differentiation.

Apple has a stellar balance sheet and returns substantial cash flow to shareholders.