What Will Apple Stock Be Worth In 2025? What Investors Should Consider (NASDAQ:AAPL)


    Japan, Tokyo, Ginza, Apple Store,

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    Elevator Pitch

    I rate Apple Inc. (AAPL) as a Hold. In my earlier November 12, 2021 article, I touched on 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 that Apple’s stock price could reach $219.60 in 2025, which translates into a three-year investment return CAGR of approximately +9.5%. This provides justification for my Hold investment rating for the stock. I have considered AAPL’s forward revenue growth, future profit margins and the appropriate P/E multiple to use in my valuation of Apple, and these are the key factors that investors should take into account as well.

    How Did Apple Do In 2021?

    Apple’s shares did well last year. The company’s share price rose by +37.2% in 2021, which was also better than the +30.6% rise in the S&P 500 over the same period.

    AAPL’s Stock Price Performance For 2021

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    AAPL’s excellent share price performance in 2021 is justified by the company’s financial results in the most recent fiscal year ended September 30, 2021 (FY 2021).

    Apple’s revenue grew by +33.3% to $365.8 billion in FY 2021, and this was the fastest that its top line has ever expanded in the past nine years as per S&P Capital IQ data. Apple also noted in its Q4 FY 2021 financial results press release that it “set new revenue records in all of our geographic segments and product categories” in the fourth quarter of fiscal 2021, with its “active installed base of devices” at “a new all-time high.” AAPL’s fiscal 2021 gross profit margin of 41.8% was also the highest it has ever been since FY 2012.

    Apple registered record sales in FY 2021 thanks to the 5G upgrade cycle, while its profitability at the gross profit level improved as a result of a favorable shift toward higher-margin revenues derived from the services segment (accounting for 18.7% of FY 2021 revenue). Notably, AAPL’s shares continued to outperform the S&P 500 in 2022 year-to-date as per the chart below.

    Apple’s 2022 Year-to-date Share Price Performance

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    In the subsequent two sections of the article, I will review Apple’s key metrics for Q1 FY 2022, and the Q2 FY 2022 outlook for the company, so as to have a better appreciation of the stock’s price performance in 2022 year-to-date.

    AAPL Stock Key Metrics

    Apple beat market expectations with its most recent Q1 FY 2022 financial results which were released on January 27, 2022.

    AAPL’s revenue expanded by +48.6% QoQ and +11.2% YoY to $124.0 billion in the first quarter of fiscal 2022, and this was +4.6% higher than the consensus forecast from Wall Street analysts. Apple’s diluted earnings per share also increased by +25.0% from $1.68 in Q1 FY 2021 to $2.10 in Q1 FY 2022, which was +11.2% ahead of what the sell-side analysts had anticipated.

    In my view, the Q1 FY 2022 key metrics that investors should take note of are product segment sales, geographic sales breakdown, and gross profit margins.

    Firstly, Apple’s iPhone sales increased by +9% YoY to $71.6 billion in Q1 FY 2022, which was the highest quarterly revenue for this product segment in the company’s history. This is a validation of Apple’s reported move to prioritize the production of iPhones over iPads as I discussed in my November article, and also supports the view that the 5G upgrade cycle continues to be a key driver of iPhone sales. As a comparison, the company’s iPad sales declined by -14% YoY to $7.3 billion in the most recent quarter.

    Secondly, Apple’s revenue from the Greater China region grew by +21% YoY to $25.8 billion in Q1 FY 2022, which represented 21% of the company’s total revenue in the recent quarter. In contrast, AAPL’s sales derived from the Americas geographical segment increased by a relatively more modest +11% YoY to $51.5 billion in the recent quarter. Apple revealed at the company’s recent 1Q FY 2022 earnings call that it boasted “the top four selling phones in urban China” and observed “a record number of upgraders and strong double-digit growth in switchers on iPhone” in this market. This points to the significant growth opportunities for Apple in foreign markets outside the US.

    Thirdly, AAPL’s gross margin improved from 39.8% in Q1 FY 2021 and 42.2% in Q4 FY 2021 to 43.8% in Q1 FY 2022. Specifically, Apple’s services segment gross profit widened by +1.9 percentage points QoQ to 72.4% in the most recent quarter, and the company stressed at its Q1 FY 2022 results briefing that “our services business in aggregate is accretive to overall company margin.”

    Is Apple Stock Expected To Rise?

    I don’t think Apple’s shares will rise significantly in the near term, and this is related to the company’s Q2 FY 2022 management guidance.

    Apple’s guidance for the current quarter, as per management’s comments at the Q1 FY 2022 investor call, is mixed in my view. On one hand, Apple expects its Q2 FY 2022 revenue to be lower on a QoQ basis, which it attributed to factors like the differences in timing of the launch of the new iPhones and the negative impact of US dollar strength. On the other hand, Apple sees the company generating a gross margin in the 42.5%-43.5% range for Q2 FY 2022. The mid-point of AAPL’s Q2 FY 2022 gross margin guidance at 43.0% is approximately +50 basis points higher than the company’s Q2 FY 2021 gross margin of 42.5%.

    As such, it makes sense that Apple’s stock price declined on an absolute basis in 2022 thus far, even though it still beat the S&P 500.

    Where Will Apple Stock Be In 2025?

    I think Apple will be a faster growing and more profitable company by 2025. In my opinion, the sell-side consensus financial estimates are fairly realistic and paint a good picture of Apple’s medium-term financial outlook.

    According to financial data sourced from S&P Capital IQ, AAPL’s top line is expected to expand by a +6.0% CAGR from $365.8 billion in FY 2021 to $462.6 billion in FY 2025. This compares favorably with the company’s much lower historical revenue CAGR of +3.3% for the FY 2015-2020 period (the exceptionally strong fiscal 2021 is left out of the comparison to avoid distortions). As I mentioned previously in this article, the 5G upgrade cycle and expansion in international markets are factors that support Apple’s accelerating top line growth in the next few years.

    With regards to profitability, Wall Street analysts forecast that Apple’s gross profit margin will increase from 41.8% in FY 2021 to 43.1% in FY 2025. It is no surprise that higher iPhone sales translates into a larger installed base which in turn drives the faster growth of the company’s services business. However, Apple is still expected to invest heavily in some of its services, with its streaming service Apple TV+ comes to mind. As such, the gross margin accretion from a higher proportion of revenue earned from the higher-margin services segment is partially offset by expectations of increased investments that will be a drag on the services business’ overall profitability.

    Is AAPL Stock A Buy, Sell, Or Hold?

    Apple is still a Hold, as I expect a reasonable but unattractive investment return CAGR based on what I think AAPL’s shares are worth in 2025.

    I value Apple’s shares at $219.60 in 2025 by applying a 30 times forward P/E multiple to the company’s consensus forward FY 2025 normalized earnings per share of $7.32 (as per S&P Capital IQ data). Assuming one holds Apple’s shares from now till early-2025, the three-year investment return CAGR for AAPL is +9.5% based on the company’s last traded share price of $167.30 as of February 18, 2022.

    I have used the market consensus EPS estimate for my valuation, as I think that the sell-side forecasts are reasonable as I explained in the preceding section. In terms of valuation multiple, Apple has traded between 11 times and 36 times consensus forward next twelve months’ normalized P/E in the past five years. In view of Apple’s improved profitability and faster revenue growth expectations, I decided to use a 30 times forward P/E multiple for my price target which is towards the higher end of its historical averages.

    In conclusion, an expected investment return CAGR of +9.5% is decent but not sufficient to warrant a Buy rating (I expect a +15% annualized return for that). As such, I maintain a Hold rating for Apple’s shares.



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