International Expansion And AI Advancements Will Boost Future Customer Engagement

Key Takeaways

• Expansion of Apple Intelligence internationally and in emerging markets like India could boost iPhone sales and offset regional headwinds.
  
• Growth in Services and AI-focused products may shift towards higher-margin offerings, positively impacting net margins and overall earnings.
  
• Apple's reliance on China, uncertainty around Apple Intelligence adoption, and FX headwinds pose risks to revenue, growth, and margin sustainability amid competitive pressures.

Catalysts

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

• Apple's international expansion of Apple Intelligence, bringing it to more languages and countries, could drive increased iPhone sales and customer engagement, thereby boosting revenue.
  
• The pipeline of innovative features for Apple Intelligence, such as enhanced Siri capabilities, may lead to greater customer retention and attract new users, potentially improving both net margins and revenue.
  
• The growth in Services revenue, fueled by increased paid subscriptions and customer engagement, suggests a shift towards higher-margin offerings, which can positively impact net margins and earnings.
  
• Apple's concerted efforts to expand in emerging markets, particularly India, could drive significant revenue growth and offset potential headwinds from other regions.
  
• Continued advancements in Apple silicon and the introduction of AI-focused products across the lineup may sustain strong sales and margins in hardware categories, positively affecting gross margins and overall earnings.

Apple Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Apple's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.3% today to 28.0% in 3 years time.
• Analysts expect earnings to reach $135.5 billion (and earnings per share of $9.63) by about March 2028, up from $96.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $110.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.8x on those 2028 earnings, down from 35.5x today. This future PE is greater than the current PE for the US Tech industry at 15.7x.
• Analysts expect the number of shares outstanding to decline by 2.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.59%, as per the Simply Wall St company report.

Apple Future Earnings Per Share Growth

Risks

• Apple's reliance on a single market, China, presents a risk as shifts in preferences away from Western technology brands towards domestic vendors could impact sales, influencing revenue and operating margins.
  
• The uncertainty around the adoption rate of Apple Intelligence and the limited availability in specific markets might slow growth in iPhone sales, potentially affecting revenue growth and market share.
  
• Mac and iPad revenue growth was bolstered by new product launches, indicating that sustaining growth might depend excessively on continual product innovation and upgrades, which could stress R&D expenditure and margin sustainability.
  
• Wearables, Home, and Accessories saw a slight decline in revenue, showcasing potential risk in maintaining growth and indicating possible saturation or heightened competition, which could weigh on revenue and profit margins.
  
• Apple's management cites FX (foreign exchange) headwinds as a future risk, indicating potential adverse impacts on revenue and gross margins due to currency fluctuations and global economic conditions.

Valuation

• The analysts have a consensus price target of $252.796 for Apple based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $325.0, and the most bearish reporting a price target of just $197.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $483.0 billion, earnings will come to $135.5 billion, and it would be trading on a PE ratio of 32.8x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $227.48, the analyst price target of $252.8 is 10.0% higher.
  
• 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.