Rising Trade Tensions And Regulatory Woes Will Impair Margins

Key Takeaways

• Geopolitical pressures, regulatory challenges, and evolving supply chains threaten Apple's margins and introduce substantial operational uncertainty.
  
• Heavy dependence on iPhone and Services faces risk from market saturation, regulatory changes, and intensifying competition in both hardware and software.
  
• Robust growth in services, custom hardware, AI innovation, and diversified supply chains strengthen Apple's margins, ecosystem, and resilience against operational risks.

Catalysts

Designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide.

• As Apple contends with proliferating geopolitical fragmentation and new trade regulations, including US-China tensions, unpredictable tariffs, and export controls, operational complexity and costs are likely to rise meaningfully. Sustained elevation of supply chain expenses and risk to continuity may compress gross margins and put net income under pressure over time, especially as supply chain diversification from China to India and Vietnam is uneven and not fully de-risked.
  
• The stagnation of global smartphone penetration, coupled with lengthening upgrade cycles in mature markets, portends flat or declining iPhone unit sales growth in the coming years. As Apple remains heavily reliant on the iPhone as its primary revenue driver, prolonged softness in smartphone growth could cause overall top-line revenue to stall and result in lower operating leverage.
  
• Regulatory scrutiny of Apple's App Store practices, including the enforcement of the EU's Digital Markets Act and outcomes from ongoing legal battles such as Epic v. Apple and the Google search antitrust case, threatens to force changes in revenue-sharing and ecosystem fees. These impacts could directly erode the Services segment's high net margins and slow earnings growth, challenging Apple's structural margin expansion thesis.
  
• Intensifying antitrust pressure on Big Tech combined with the emergence of open-source and cross-platform alternatives may undermine Apple's ability to tightly integrate hardware and software, weakening its competitive moat. This commoditization, paired with fierce competition from lower-cost global manufacturers, risks erosion of hardware pricing power and associated gross margins across flagship devices.
  
• Privacy and data security regulation is expected to only become stricter worldwide, raising barriers for Apple's Services business to execute on data-driven monetization and AI personalization strategies. If Apple fails to match more nimble competitors in leveraging advanced AI or cannot realize expected incremental Services revenue, both revenue and long-term earnings growth will disappoint current lofty expectations.

Apple Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Apple compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Apple's revenue will grow by 3.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 24.3% today to 23.1% in 3 years time.
• The bearish analysts expect earnings to reach $102.9 billion (and earnings per share of $7.49) by about July 2028, up from $97.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 30.3x on those 2028 earnings, down from 32.3x today. This future PE is greater than the current PE for the US Tech industry at 19.4x.
• Analysts expect the number of shares outstanding to decline by 1.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

Apple Future Earnings Per Share Growth

Risks

• Strong global demand for personal and wearable technology is evidenced by Apple's record quarterly revenues in multiple regions and all-time highs in active device installations, which supports robust top-line revenue growth in the long term.
  
• Expansion in high-margin Services, which posted 12% year-over-year growth to an all-time record and now includes over 1 billion paid subscriptions, is improving structural net margins and earnings generation.
  
• Increased vertical integration through custom Apple silicon, including the new A18 and M4 chips and the C1 modem, is enhancing product performance and enabling cost control, bolstering gross margins and competitive differentiation.
  
• Continued investment in AI, including the rollout of Apple Intelligence across devices and multiple languages, along with new product categories like Vision Pro and advances in health features, provides multi-year catalysts for incremental revenue growth and ecosystem stickiness.
  
• Strategic diversification of the supply chain across India, Vietnam, and the US, along with large-scale investment in US production and data centers, is reducing operational risk and positioning Apple to better manage cost pressures, supporting steady earnings and margin resilience over time.

Valuation

• The assumed bearish price target for Apple is $175.33, which represents two standard deviations below the consensus price target of $229.05. This valuation is based on what can be assumed as the expectations of Apple's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $300.0, and the most bearish reporting a price target of just $173.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $445.6 billion, earnings will come to $102.9 billion, and it would be trading on a PE ratio of 30.3x, assuming you use a discount rate of 7.9%.
• Given the current share price of $210.16, the bearish analyst price target of $175.33 is 19.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.