Apple experienced a significant decline in the first quarter due to worries about weak demand for iPhones and regulatory challenges. Despite this, analysts on Wall Street suggest reevaluating the stock, noting that its value has fallen well below historical averages, while its core business remains strong.
"We are optimistic about Apple's future," said analysts at Bernstein in a note on Thursday, emphasizing the stock's recent underperformance and negative investor sentiment. "We believe that its core business and financial model remain solid," they added.
Apple's stock dropped 11% in the first quarter, leading to a valuation well below its five-year averages. However, Bernstein argues that trading at about 24 times next year's earnings is not an unreasonable valuation.
Concerns about slowing iPhone sales, particularly in China, have fueled pessimism, but the anticipated release of the iPhone 16 with artificial intelligence capabilities could drive a strong upgrade cycle.
While Apple may not be the first to introduce AI-powered smartphones, past trends suggest that it doesn't necessarily need to attract new users from Android but rather focus on persuading existing iPhone users to upgrade.
Despite hopes for a super upgrade cycle, skeptics remain cautious, given previous instances where expectations fell short.
However, the narrative of slowing iPhone sales overlooks Apple's robust services segment, which has continued to drive double-digit earnings growth even as iPhone sales plateaued.
Services, including the App Store and licensing fees, account for over 50% of Apple's services revenues and more than 60% of gross profits, according to Bernstein.
While regulatory challenges, particularly in Europe, pose a threat to Apple's App Store practices, they currently represent a small portion of its overall revenue. The potential impact of regulatory scrutiny in the U.S. remains uncertain, with the Department of Justice's case primarily focused on opening up Apple's platform rather than directly targeting its profit-driving services business.
Overall, the regulatory landscape does not pose an immediate threat to Apple's key growth engine, allowing its services story to remain intact for the foreseeable future.
Paraphrasing text from "Investing" all rights reserved by the original author.
