Apple: Enough to tip the scales in its favor (NASDAQ:AAPL)

Apple Inc. (NASDAQ:AAPL) celebrated its launch of the iPhone 16 event Earlier this week, the iPhone 16 Pro and iPhone 16 Pro Max debuted alongside other new products including the new AirPods and the Apple Watch Series 10. The event received a less than positive response. The reaction was more enthusiastic on the part of customers and the market and more provocative on the part of Huawei, which Uncovered its Huawei Mate XT Tri-fold smartphone the same week. We maintain a positive outlook on Apple for 2025 despite concerns about the negative impacts of Huawei's comeback and subdued smartphone demand. update note Apple's stock growth since the beginning of July is based on two factors that continue to heavily influence the stock: 1. The market has recognized weak smartphone demand and intensifying competition on the Chinese front, and 2. Better positioning to turn around its lackluster iPhone sales with Apple. Intelligence. We're taking a closer look at our views on Apple in light of the iPhone event and Huawei launch.

Here's our breakdown of both factors:

1. The market has recognized the declining demand for smartphones and intensifying competition on the Chinese front:

In our view, smartphone demand is still largely being digested by the market. That said, there is hope for a better iPhone replacement cycle this time around after Apple said The production supply chain is gearing up for 90 million units, a 10% increase from the planned production for the iPhone 15 series. This news caused Apple-exposed stocks such as Qorvo, Inc. (QRVO), Skyworks Solutions, Inc. (SWKS), and QUALCOMM Incorporated (QCOM) to trade slightly higher in late August. We believe the market is more optimistic about end-user smartphone demand now than it was before Apple’s crisis. third quarter earningsin which Apple beat expectations on better than expected iPhone sales, down 0.9%, better than the 2.2% expected. Also, we are seeing more iPhone discounts, mentioned in the Q3 earnings conference call, which explains the better unit volume data being released and the optimism generated by that. We believe that Apple should be able to beat expectations in the December quarter, not on actual demand recovery, but on a better iPhone replacement cycle compared to the iPhone 15 lineup due to the additional Apple Intelligence feature.

We believe that concerns about intensifying competition on the Chinese front have also been acknowledged by the market but remain a headwind for the stock. Huawei's launch of the world's first three-fold foldable smartphone design which, when fully unfolded, measures 10.2 inches diagonally, shows Huawei's potential ability to out-innovate Apple. News of Huawei's launch and the over 3.5 million units already pre-ordered became more worrying in light of Apple's existing struggles on the Chinese front. The stock did not react substantially, showing the competition risk built into the price. The company also reported a 6.5% year-over-year decline for all of Greater China in Q3 2024 and no do ranked among the top five smartphone vendors for the mainland Chinese smartphone market in the second quarter of 2024, marking the first historic quarter in which domestic players dominated the top five vendor positions in the market, as shown below.

Overall, we don’t think Apple is going away, even with the seemingly impenetrable comeback of Huawei, which has relied solely on internal sources, and China’s domestic efforts in technology. The reason we’re not too worried has a lot to do with price. We expect Apple to dominate the mid-to-high-end smartphone market, with Huawei potentially dominating the high-end market, given the latest product price, which is nearly four times the starting price of Apple’s iPhone 16, at $799. Additionally, we remind investors that Apple hasn’t created a single device, but an ecosystem. Apple’s services business segment remained the company’s fastest-growing segment in the third quarter and is expected to see double-digit year-over-year growth next quarter. We believe Apple Intelligence will play a visible role in improving Apple’s services revenue in fiscal 2025.

2. Better positioning to reverse weak iPhone sales with Apple Intelligence:

This brings us to the second factor: Apple Intelligence acts as a catalyst for the iPhone replacement/upgrade cycle. The iPhone 16 series is powered by the A18 chip and A18 Pro chip based on Taiwan Semiconductor Manufacturing Company Limited's (TSM) second-generation 3nm technology that provide “2x the speed of previous chips for machine learning,” 17% more system memory bandwidth, and the new 5-core GPU in the A18 chip provides “up to 40% faster performance than the GPU used in A16 Bionic (used in iPhone 15)” while using 35% less power. The earnings call said the iPhone 15 outperformed the iPhone 14 in terms of iPhone replacement cycles. CEO Tim Cook noted in the Q&A that “if you look at the same number of weeks of the '15 since launch and compare that to the '14, the '15 is outperforming the '14. And that's where we are right now.” We think this sentiment may extend to the iPhone 16 series, and we could see a healthier upgrade cycle than expected due to potential pent-up demand and discounts, making for affordable premium devices. We were looking at the pricing of the iPhone 16 relative to the iPhone 15, and we think the fact that there was no change in the initial price also demonstrates Apple's advantage and ability to play with pricing.

Rating and opinion on Wall Street

Apple stock is still trading slightly above its large-cap peer group average. In terms of P/E, the stock is trading at around 31.9x C2024 compared to the peer group average of 30.7x and not far off its ratio of 31.5 when we updated in early July. The stock is trading at 8.5x EV/C2024 Sales versus the peer group average of 7.0x and its ratio of 8.4 in July. We still believe that Apple is fairly valued considering that the iPhone is still the gold standard for smartphones and Apple, with a market cap of $3.38 billion, is the largest company by market cap. The chart below outlines Apple’s valuation versus the peer group average.

Wall Street remains more bullish on the stock. Of the 48 analysts covering the stock, 36 have a buy rating, 11 have a hold rating, and the remaining one has a sell rating. Sell-side price targets expect an upside potential of between 9% and 10% for the stock, with a median price target of $243 and a mean of $241. The charts below outline Apple's sell-side ratings and price targets.

What to do with the stock?

We maintain our positive sentiment on Apple through the December quarter. While the headwind from Chinese competition continues to weigh on sales in China, we are more optimistic about Apple's position in the mid-range market with Apple Intelligence and discounts until end demand recovers. We also believe that discounts should cause some damage to the Android market, particularly Samsung. This is notable. considering Samsung dethroned Apple in Q1 2024 as the top phone manufacturer. We expect Apple to reclaim the title from Samsung in 2025. We are watching closely to determine the added value that Apple Intelligence will bring to the consumer experience. We believe it is still too early to define its success. However, we believe in the capability of a strong upgrade cycle even before that is determined. We expect Apple to deliver a strong performance next year.