We’ve raised our fair value estimate for Apple [AAPL] stock to $160 from $150 after modest upward revisions to our five-year sales forecast. We’ve also lowered our Uncertainty Rating to Medium from High, based on our higher conviction in the firm’s ability to offset consumer spending cycles with its premium and differentiated approach. We continue to see Apple as a dominant technology ecosystem provider meriting a wide economic moat, and we maintain our exemplary capital allocation rating based on a strong investment track record that has helped carve that moat.
We believe Apple is a fundamentally excellent company, but continue to see its stock valuation as challenging. That valuation has surged more than 40% in 2023, based on new product launches and improving macroeconomic conditions. Simply put, we think Apple stock has outpaced the firm’s fundamentals, and recommend waiting for a pullback before investing.
We believe Apple has cemented a long-term position atop the consumer electronics industry with a focus on a premium ecosystem of tightly integrated hardware, software, and services. We see its flagship iPhone as the linchpin of this ecosystem from which Apple derives its pricing power, switching costs, and network effect. In our view, every other Apple device and service sees its greatest value from further locking customers into this walled garden.
We are impressed by Apple’s core design prowess across both hardware and software, which we think is the product of immense cumulative research and development investments. We like the firm’s latest push to bring most of its chip development in-house. To us, this gives it more opportunity for product customisation and a better ability to differentiate. In our view, Apple reduces its cyclicality compared with other consumer electronics players by melding its semiconductors, hardware, and software.
Apple to Focus on Chip Development and AI
Over the medium term, we expect Apple to focus on progressing its internal chip development, artificial intelligence capabilities, and further developing new form factors like its Vision Pro headset. Each one of these initiatives will hedge the firm against disruption risk, in our view. We also anticipate the company will continue returning tremendous amounts of cash back to shareholders, which is supported by its strong balance sheet.
We hold concerns over geopolitical and regulatory risk for Apple but don’t see these threatening the firm’s moat. Apple’s supply chain is heavily concentrated in China and Taiwan, and disruptions to the status quo in these regions could limit its supply.
Apple has thus far been adept at managing its complex supply chain and is actively diversifying into new regions. It has also been targeted by regulations, particularly out of Europe, that chip away at its differentiation by opening up its App Store and iMessage services. We don’t foresee more damaging regulation on the horizon and believe the firm is adequately reinforcing its stickiness with customers by adding new devices and services with which to lock them in.
Services are Apple’s next biggest revenue contributor over our forecast, and we forecast 7% services revenue growth. Services are driven in large part by revenue from Google for its status as the default search engine on the Safari browser as well as Apple’s cut of app Store sales. We expect solid growth in Google revenue but see a more mixed outlook for App Store results, where we forecast growth in overall app revenue but progressively lower cuts going toward Apple as the result of regulatory pressures. Elsewhere, we see roughly high-single-digit growth across revenue from Apple Music, Apple TV+, Apple Pay, AppleCare, and Apple’s other services.
Apple Wearables Are One to Watch
We see the highest growth opportunity in Apple’s wearables revenue, to the tune of 17% through fiscal 2028, primarily driven by our expectations for the ramp of the new Vision Pro headset. We project a rapid ramp for Vision Pro, approaching 10 million unit sales and $30 billion in revenue in fiscal 2028. We see high-single-digit growth for Apple Watch and AirPods sales, with both products continuing to gain share.
Across Apple’s other primary hardware products, Mac and iPad, we see 6% and 3% compound annual revenue growth, respectively. We expect Mac to see stronger short-term revenue from a cyclical rebound in consumer PC spending as well as existing Mac customers refreshing Intel-based notebooks to the new M-series lineup. We think iPad growth will be more tepid but with continued penetration in enterprise applications.
