Summary in seconds
I rate Apple Inc. (AAPL) as a hold. In my November 12, 2021 post, I referred to the “AAPL’s decision to prioritize iPhone 13 production to meet demand,” as reported in the media. This article focuses on Apple’s outlook and expected valuations in 2025.
I think Apple’s stock price could reach $219.60 in 2025, which translates to a three-year ROI CAGR of around +9.5%. This justifies my Hold investment rating for the stock. I considered AAPL’s future revenue growth, future profit margins, and the appropriate P/E multiple to use in my valuation of Apple, and these are the key factors for investors to consider as well.
How did Apple do in 2021?
Apple shares have done well over the past year. The company’s share price rose +37.2% in 2021, which was also better than the +30.6% rise in the S&P 500 over the same period.
AAPL Share Price Performance for 2021
AAPL’s excellent share price performance in 2021 is supported by the company’s financial results for the most recent financial year ended September 30, 2021 (fiscal year 2021).
Apple’s revenue grew by +33.3% to $365.8 billion in fiscal 2021, and this is its fastest growing revenue in the world. over the past nine years, according to S&P Capital IQ The data. Apple also noted in its fourth quarter fiscal 2021 financial results press release that it “set new revenue records across all of our geographic segments and product categories” in the fourth quarter of fiscal 2021. , with its “active installed base of devices” at “an all-time high.” AAPL’s fiscal 2021 gross profit margin of 41.8% was also the highest on record since fiscal 2012.
Apple posted record sales in fiscal 2021 on the back of the 5G upgrade cycle, while its gross-margin profitability improved on a favorable shift to higher-margin revenue from the services segment (representing 18.7% of fiscal 2021 revenues) . Notably, AAPL shares have continued to outperform the S&P 500 in 2022 since the start of the year, as shown in the chart below.
Apple stock price performance since the start of 2022
In the next two sections of the article, I will review Apple’s key indicators for the first quarter of fiscal 2022 and the company’s outlook for the second quarter of fiscal 2022, in order to have a better appreciation of share price performance in 2022 since the beginning of the year.
Key measures of AAPL actions
Apple exceeded market expectations with its latest financial results for the first quarter of fiscal 2022, released on January 27, 2022.
AAPL’s revenue increased +48.6% quarter-over-quarter and +11.2% year-over-year to $124.0 billion in the first quarter of Fiscal 2022, or +4.6% from more than the consensus forecast of Wall Street analysts. Apple’s diluted earnings per share also increased by +25.0%, from $1.68 in Q1 2021 to $2.10 in Q1 2022, +11.2% more than analysts quoted. sale had planned.
In my view, the key metrics for the first quarter of fiscal 2022 that investors should consider are sales by product segment, geographic distribution of sales, and gross profit margins.
First, Apple’s iPhone sales grew +9% year-over-year to $71.6 billion in the first quarter of fiscal 2022, the highest quarterly revenue for this year. product segment in the company’s history. This is a validation of Apple’s announced decision to prioritize the production of iPhones over iPads, as I explained in my November article, and also confirms the idea that the cycle 5G upgrade continues to be a key driver of iPhone sales. By comparison, the company’s iPad sales were down -14% year-over-year to $7.3 billion in the most recent quarter.
Second, Apple’s revenue in the Greater China region grew +21% year-on-year to $25.8 billion in the first quarter of fiscal 2022, which accounted for 21% of total revenue in the region. business during the last quarter. In contrast, AAPL sales from the Americas geography grew at a relatively more modest rate of +11% year-over-year to $51.5 billion in the most recent quarter. Apple revealed during the company’s recent Q1 FY2022 earnings call that it boasted “the four best-selling phones in urban China” and observed “a record number of upgrades and strong double-digit growth of Switches on iPhone” in this market. This underscores the significant growth opportunities for Apple in overseas markets outside of the United States.
Third, AAPL’s gross margin decreased from 39.8% in the first quarter of fiscal 2021 and 42.2% in the fourth quarter of fiscal 2021 to 43.8% in the first quarter of fiscal 2022 Specifically, Apple’s services segment gross profit rose +1.9 percentage points QoQ to 72.4% in the most recent quarter. , and the company emphasized in its first-quarter fiscal 2022 earnings briefing that “our services business as a whole is accretive to the company’s overall margin.”
Should Apple stock rise?
I don’t think Apple shares will rise significantly in the near term, and that ties into the company’s management guidance for the second quarter of fiscal 2022.
Apple’s guidance for the current quarter, based on management’s comments on the first quarter fiscal 2022 investor call, is mixed in my opinion. On the one hand, Apple expects its fiscal 2022 second-quarter revenue to be lower on a quarterly basis, which it attributes to factors such as differences in the launch schedule for new iPhones and the negative impact of the strength of the US dollar. On the other hand, Apple sees the company generating gross margin in the range of 42.5% to 43.5% for the second quarter of fiscal 2022. The midpoint of AAPL’s gross margin forecast for the second quarter of fiscal 2022 at 43.0% is approximately +50 basis points higher than the company’s gross margin in the second quarter of fiscal 2021 of 42.5%.
As such, it makes sense that Apple’s stock price has fallen on an absolute basis in 2022 so far, despite still beating the S&P 500.
Where will Apple stock be in 2025?
I believe that Apple will be a faster growing and more profitable company by 2025. In my opinion, the consensus sell-side financial estimates are quite realistic and paint a good picture of Apple’s medium-term financial outlook.
According to financial data from S&P Capital IQ, AAPL’s revenue is expected to grow at a CAGR of +6.0%, from $365.8 billion in fiscal 2021 to $462.6 billion in fiscal 2025. compares favorably to the company’s historical revenue CAGR of +3.3% for fiscal year 2015-2020 (the exceptionally strong fiscal year 2021 is excluded from the comparison to avoid distortions). As I mentioned earlier in this article, the 5G upgrade cycle and expansion into international markets are factors supporting Apple’s accelerating revenue growth over the next few years. .
When it comes to profitability, Wall Street analysts expect Apple’s gross profit margin to decline from 41.8% in fiscal year 2021 to 43.1% in fiscal year 2025. It doesn’t It’s no surprise that higher iPhone sales translate to a larger installed base, leading to faster growth. of the company’s service activity. However, Apple is still expected to invest heavily in some of its services, with its Apple TV+ streaming service coming to mind. Thus, the increase in gross margin from a higher proportion of revenues from the higher-margin services segment is partially offset by expectations of increased investments that will dampen the overall profitability of the services business.
Is AAPL stock a buy, sell or hold?
Apple is still on hold as I expect a reasonable but unattractive ROI CAGR based on what I think AAPL’s stock is worth in 2025.
I value Apple shares at $219.60 in 2025 by applying a 30x P/E multiple to the company’s consensus normalized earnings per share for fiscal year 2025 of $7.32 (according to S&P Capital IQ data). Assuming one owns Apple stock by early 2025, the three-year ROI CAGR for AAPL is +9.5% based on the last traded share price of the company of $167.30 as of February 18, 2022.
I used the market consensus EPS estimate for my assessment because I believe the sell-side forecast is reasonable, as I explained in the previous section. In terms of valuation multiple, Apple has traded between 11 and 36 times the normalized next-twelve-month P/E over the past five years. Given Apple’s improving profitability and expectations of faster revenue growth, I’ve decided to use a 30x P/E multiple for my price target, which is on the higher end. from its historical averages.
In conclusion, an expected ROI CAGR of +9.5% is decent but not enough to warrant a buy rating (I’m expecting an annualized return of +15% for this). As such, I maintain a Hold rating for Apple shares.