Apple will release its fourth-quarter earnings report tonight. The market expects revenue to grow 11% year over year to $113.5 billion, with net profit rising 6% to $29.2 billion. The foldable-screen iPhone Duo is being included in performance analysis for the first time, with demand, supply, and product performance drawing close attention. As the stock price has surged and valuations have reached historic highs, whether the report can deliver on growth expectations and sustain strong free cash flow will be crucial.
$Apple (AAPL.US)$The stock's strong rally over the past few months has left it with virtually no room for error ahead of its earnings report after the U.S. market opens on Monday.
Since the late-June low, Apple's share price has risen 25% cumulatively, and its market capitalization has increased by about $1 trillion. At a time when major tech peers such as Google and Amazon are heavily investing in AI infrastructure, sparking market concerns, Apple's steady revenue growth and surging free cash flow have made it an "safe haven" in investors' eyes. However, this rally has also pushed Apple's valuation to its highest level since 2008—measured by the forward 12-month P/E ratio, Apple stands at 36 times, roughly twice that of the S&P 500 index.
Last Friday, as disappointing earnings reports from Google and Amazon dragged AI-related stocks lower and the Philadelphia Semiconductor Index plunged 7.2% in a single day, Apple's share price fell by only 1.2%, outperforming the broader market significantly. Taking advantage of NVIDIA's sell-off, Apple reclaimed its position as the world's most valuable company after several months, with a market capitalization of $5.03 trillion. This earnings report will be the first real stress test for this "safe haven" narrative.
With valuations so high, there is little room for error left.
Apple's recent rally has left its share price in a state of extreme overpricing, and any surprise could trigger a reevaluation of its valuation.
Ben Carew, Co-Chief Investment Officer at Tandem Investment Advisors, said: "Apple's current valuation is at the 99th percentile historically. When a stock is so fully priced, risks arise once an unexpected event occurs. It currently serves as a safe-haven asset, but if growth falls short of market expectations, investors will question whether it is truly that safe, and its valuation multiples could then face reevaluation."
This risk is not unfamiliar to long-time observers of Apple. Three months ago, weighed down by component shortages that dented quarterly revenue expectations, Apple's stock posted its biggest one-day drop in 16 months.
Wall Street expects Apple's fourth-quarter revenue to rise 11% year over year to $113.5 billion, with net profit increasing 6% to $29.2 billion. If achieved, this would mark Apple's best full-year sales growth since 2021—15%. However, according to the average analyst estimate compiled by Bloomberg, growth is expected to slow over the next two years.
The foldable iPhone Duo has become a key variable.
This earnings report will, for the first time, disclose the market performance of Apple's brand-new foldable-screen model, the iPhone Duo, which is also the core highlight of this quarter's results. The device officially went on sale last month, and Apple said demand has been "unprecedented," with delivery times now pushed back to next year.
The Duo is of great significance to Apple. It not only represents the most substantial design overhaul in years for Apple's flagship product, but its starting price is as high as $1,999. Investors are hopeful that this premium pricing will boost growth. According to Bloomberg Industry Research, the iPhone Duo could contribute $28 billion to $32 billion in sales in fiscal year 2027 and drive further increases in average selling prices as consumers shift away from lower-priced models such as the Pro and Pro Max.
However, analysts also point to potential concerns: limited supply, coupled with reports that the Duo's screen has cracked after only brief use, could diminish its market appeal beyond early adopters.
Free cash flow underpins the "safe haven" rationale.
Compared with most of its large tech peers, Apple's revenue growth is relatively sluggish, but its free cash flow performance stands out, which happens to be the metric the market values most right now. As investors grow increasingly skeptical about the AI spending boom, Apple's ability to return cash forms the core of its appeal.
Apple's free cash flow is expected to grow by more than 40% to $141.5 billion in fiscal year 2026, with continued growth projected over the following three fiscal years. By contrast, Google, Meta, and Amazon all face free cash flow shortfalls, a situation that is expected to persist.
Daniel Flax, a senior research analyst at Neuberger Berman, said: "The market recognizes Apple's strength in free cash flow. If this momentum continues, I believe the stock still has room to create further value from its current level. The ability to execute product cycles and translate them into robust free cash flow growth will be the most critical factor determining the stock's performance. At least for now, early signs indicate that Duo is attracting considerable attention."
Analyst enthusiasm has cooled, and the stock price has already surpassed its target price.
Nevertheless, the combination of high valuations and low growth has dampened Wall Street's enthusiasm. Since Apple's last earnings report at the end of July, at least six analysts have lowered their ratings. Loop Capital downgraded Apple from "Buy" to "Hold" in October, citing weak iPhone shipment trends; Bank of America removed Apple from its "U.S. Select No. 1" top picks list last Friday, stating, "We remain cautious on near-term positioning due to potential headwinds relative to market consensus expectations."
Among analysts tracked by Bloomberg, fewer than 60% recommend buying Apple, while the buy recommendation rates for Microsoft, Amazon, and Meta all exceed 90%. More notably, Apple's share price has already risen above the analysts' average target price, making it the only member of the "Magnificent Seven" with a negative implied return over the next 12 months.
Ben Carew of Tandem concluded: "Valuation is the core risk facing Apple, but given the relative certainty of its business model, a certain valuation premium is reasonable. The volatility elsewhere in the tech sector precisely reflects the market's uncertainty about their prospects. Unless this earnings report truly shakes the market's fundamental view of Apple—which I don't think is likely—Apple should at least be able to remain immune to some of the volatility."
Editor/lambor