Apple Inventory: Continues To Lose Smartphone Market Share (NASDAQ:AAPL) – Go Well being Professional

Funding thesis

Demand within the international market of units continued to bounce again. Apple (NASDAQ:AAPL) (AAPL:CA) bought 45.6 mln smartphones (+6% y/y) in 3Q 2024, whereas the overall smartphone market climbed by 12% y/y to 288.9 mln items. Apple’s share of the smartphone market shrank to 16%, down 1 pp from a yr earlier. Falling gross sales in China have been compensated by rising gross sales in India. However within the Indian market, iPhone is taken into account an costly model, so the compensation brought on the typical income per buyer to drop to ~$860 (-7% y/y).

Final quarter, as we wrote in our earlier article, Apple additionally misplaced share within the smartphone market: in Q2 2024, Apple Inc. bought 48.7 million smartphones (-16% YoY), whereas the overall smartphone market grew by 10% YoY to 296 million items. The score is HOLD.

Smartphone market

Whole smartphone shipments climbed by 12% y/y to 288.9 mln items in 2Q 2024 (3Q 2024 for Apple).

Apple’s gross sales totaled 45.6 mln smartphones (+6% y/y), and Apple’s share of the smartphone market shrank to 16% from 17% in 2Q 2023 (3Q 2023 for Apple).

Growing international locations in Asia, Latin America, Africa and the Center East proceed to be the primary progress driver for the smartphone market. Bodily gross sales there expanded by 10% to twenty% y/y in 2Q 2024. Nonetheless, when it comes to cash, the primary markets for Apple are the US, China and Europe. Whole smartphone gross sales climbed by 5% y/y within the US, 14% y/y in Europe, and 6% y/y in China. Even so, Apple continued to lose market share in China, yielding it to native producers. Apple’s market share in China fell to fifteen.5% from 17.4% a yr earlier, whereas bodily gross sales declined by 6%.

Luxurious smartphone manufacturers – Apple and Samsung – are being helped by the market restoration within the US and Europe, as outdated inventories have been bought out and shops have began to vigorously rebuild them earlier than the brand new vacation season. Within the second half of 2024, main manufacturers might be trying to ramp up shipments of smartphones which have GenAI onboard. Within the close to future, this would be the foremost issue that can affect gross sales of any explicit model.

At a developer convention, Apple unveiled its personal Apple Intelligence, which it plans to embed into smartphones and Siri to enhance understanding of pure language. As well as, Apple entered right into a partnership with OpenAI and can embed ChatGPT into its units. In line with insiders, the partnership with OpenAI just isn’t for revenue, which means that Apple won’t pay OpenAI for utilizing ChatGPT. As a substitute of fee, OpenAI will get entry to Apple’s giant buyer base and can seemingly promote them mini-apps which can be embedded in ChatGPT – transactions for which Apple will earn a 30% fee.

We anticipate that Apple, by integrating with OpenAI, will regain market share extra rapidly, particularly within the US and EU. In developed international locations, Apple competes primarily with Samsung, whose AI is weaker than ChatGPT. Apple won’t have this benefit within the Chinese language market, the place the US tech big will use Baidu’s AI, which ranges the taking part in discipline for native suppliers.

We’re additionally seeing client spending within the US and Europe really exceeding disposable revenue, which is steadily depleting built-up financial savings and squeezing demand for sturdy items.

Because of this, regardless of the speedy market restoration within the first half of the yr, we’re sustaining our forecast for smartphone shipments for the complete yr of 2024 at 1.2 bln items (+5% y/y) and at 1.26 bln items (+5% y/y) for 2025.

Contemplating the mixing between Apple and OpenAI, we’re elevating the forecast for iPhone’s market share from 19% (-0.9 pp) to 19.6% (-0.3 pp) for 2024, and from 19.3% (+0.3 pp) to 21.1% (+1.5 pp) for 2025.

Falling gross sales in China have been compensated by rising gross sales in India. However within the Indian market, iPhone is taken into account an costly model, so the compensation brought on the typical income per buyer to drop to ~$860 (-7% y/y).

Because of this, we’re decreasing the projected common income per one iPhone from $935 (+3% y/y) to $886 (-2% y/y) for 2024, and from $982 (+5% y/y) to $884 (-0.2% y/y) for 2025.

Given all of the adjustments, we’re reducing the forecast for Apple’s income from $203.6 bln (+1% y/y) to $198 bln (-1% y/y) for 2024, and from $223 bln (+10% y/y) to $215.6 bln (+9% y/y) for 2025.

Apple’s different segments

The Mac section delivers secure monetary outcomes. Income within the section totaled $7 bln (+2% y/y). The corporate bought 5.5 mln Macs, up 6% from a yr earlier. Common income per machine slid by 2% y/y. Apple’s market share within the PC section edged up barely to eight.8% (+0.2 pp y/y). The worldwide PC market continued to rebound at a average tempo. Whole PC shipments climbed by 3.4% y/y to 62.8 mln items.

The iPad section began to get well quickly. Income within the section totaled $7.2 bln (+24% y/y). We attribute this to the discharge of the brand new iPad 2024 in Might 2024. The brand new model of the iPad is way superior to earlier variations and is powered by the revolutionary M4 chip. The pill additionally incorporates an NPU Neural Engine, making it appropriate for widespread use of AI apps.

Income from wearable units, which embody Apple Imaginative and prescient Professional, totaled $8.1 bln, down 2% y/y. Apple faces quickly growing competitors within the smartwatch and wi-fi headphone market from Chinese language rivals and the Nothing model, which have improved so much when it comes to expertise and design over the previous yr.

The corporate plans to promote the Imaginative and prescient Professional in 8 extra international locations, together with China and Japan. A brand new OS – VisionOS2 – has been introduced for the Imaginative and prescient Professional. It is going to use machine studying for creating spatial photographs and have new hand gestures. In the interim, Apple Imaginative and prescient Professional will be described as an experimental mannequin, which attracts demand primarily from corporations which can be making an attempt to check it and adapt it to their very own wants.

The corporate’s companies income got here in at $24.2 bln, up 14% from a yr earlier.

Apple’s monetary outcomes

We’re decreasing the forecast for Apple’s income from $395.6 bln (+3% y/y) to $391.3 bln (+2% y/y) for 2024, and from $444.7 bln (+12% y/y) to $443.8 bln (+13% y/y) for 2025 as a result of expectations of weaker smartphone gross sales, despite the fact that that’s partially mitigated by increased forecasts for gross sales within the iPad and companies segments.

We’re decreasing the EBITDA forecast from $140.7 bln (+12% y/y) to $135.5 bln (+8% y/y) for 2024 because of the lowered income forecast and better prices of components for the corporate’s units and barely elevating it from $155.8 bln (+15% y/y) to $157.7 bln (+16% y/y) for 2025 as a result of speedy progress in Apple’s marginal companies section, which can offset the discount within the firm’s machine income forecast.

Valuation

We’re elevating the goal value of the shares from $171 to $223 as a result of:

• the rise within the goal a number of for Apple from 17.5x to 22.4x;
• the lowered EBITDA forecast for 2024 and 2025;
• the rise of internet debt from ($58) to ($52) bln;
• the lower of the variety of diluted excellent shares from 15.5 bln to fifteen.4 bln;
• the shift of the FTM valuation interval.

We’re assigning a HOLD score to the inventory.

Conclusion

Apple is a high-tech firm that’s busy growing its personal ecosystem. Nonetheless, the current traits within the smartphone market considerably restrict its progress potential. We consider the corporate is buying and selling near truthful worth. The score is HOLD.

To handle your positions, we suggest following Apple’s earnings releases and market updates.