Apple’s AAPL streaming service, Apple TV+, is basking on the glory of Severance season 2, the finale of which is streaming today. Severance broke Ted Lasso’s record in becoming Apple TV+’s most-viewed series in history based on the number of unique viewers between Jan. 17 (the day season 2 was released) through Feb. 17.
Severance, along with Ted Lasso, Slow Horses and Silo, are a few of the Apple TV+ shows that have gained fame in recent years. However, the number is quite small compared with content offerings from bigger rivals, including Netflix NFLX, Amazon AMZN and Disney DIS. Apple TV+’s low popularity is hurting profitability, with the service losing more than $1 billion per The Information, which also claimed that the platform had roughly 45 million subscribers in 2024.
Although a $1 billion loss is a big figure, we don’t see it as a serious concern for Apple, given its modest spending on content ($100 million or less on a dozen movies annually) and strong liquidity (cash balance of $141.37 billion as of Dec. 28, 2024). The company leverages Apple TV+, along with Apple Music, Apple Arcade, and Apple Pay, to attract users to its Services portfolio, which currently has more than 1 billion paid subscribers, more than double what Apple had four years ago.
Although Apple’s business primarily runs around its flagship iPhone, the Services portfolio has emerged as the company’s strong growth driver. In the fiscal first quarter, Services revenues grew 14% year over year, and Apple expects the March-end quarter’s (second-quarter fiscal 2025) revenues to increase by low double digits on a year-over-year basis. Hence, the success of Severance bodes well for Apple’s overall Services business. But can this help the AAPL stock, which is down 14.5% year to date, recover this year? Let’s dig deep to find out.
Apple Stock's Performance
Image Source: Zacks Investment Research
Challenging iPhone Sales a Headwind for Apple
Apple has been suffering from sluggish demand for the iPhone in China amid increasing competition from the likes of Huawei and Xiaomi, as well as the lack of Apple Intelligence. Although iPhone sales decreased 0.8% year over year to $69.14 billion in the first quarter of fiscal 2025, Apple saw better iPhone 16 sales in regions where Apple Intelligence was available. iPhone’s active installed base grew to an all-time high and saw a record level of upgrades in the reported quarter. As per Kantar, the iPhone was a top-selling model in the United States, Urban China, India, the U.K., France, Australia and Japan.
Although Greater China sales decreased 11.1% year over year, Apple benefited from strong sales in a number of emerging markets, including India. In the first quarter of fiscal 2025, the iPhone was the top-selling model in the country. The company saw double-digit growth in the installed base in the emerging markets.
Apple launched the first set of Apple Intelligence features in U.S. English for iPhone, iPad and Mac, and introduced more features while expanding to more countries in December. Apple Intelligence is now available in Australia, Canada, New Zealand, South Africa, and the U.K. In April, Apple is set to launch the next level of language updates with Apple Intelligence, including French, German, Italian, Portuguese, Spanish, Japanese, Korean, simplified Chinese, and localized English to Singapore and India. This is expected to boost iPhone upgrades and further increase in installed base.
AAPL Estimates Show Downward Trend
The Zacks Consensus Estimate for Apple’s fiscal 2025 earnings has declined a couple of cents to $7.26 per share over the past 30 days, indicating 7.56% growth from the figure reported in fiscal 2024.
Apple’s earnings beat the Zacks Consensus Estimate in the trailing four quarters, the average earnings surprise being 4.39%.
Apple Inc. Price and Consensus
Apple Inc. price-consensus-chart | Apple Inc. Quote
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Apple Shares Overvalued
The AAPL stock is not so cheap, as the Value Score of D suggests a stretched valuation at this moment.
Apple is trading at a premium with a forward 12-month P/E of 27.85X compared with the sector’s 23.92X, reflecting a stretched valuation.
Price/Earnings (F12M)
Image Source: Zacks Investment Research
AAPL shares are now trading below the 50-day and 200-day moving averages, indicating a bearish trend.
Apple Trades Below 50-day & 200-day SMAs
Image Source: Zacks Investment Research
Apple Intelligence’s Underwhelming Performance a Concern
Apple’s AI push with Apple Intelligence is noteworthy. However, the delay in launching some improvements to Siri, which are now pushed to 2026 instead of 2025, puts Apple’s AI efforts under scrutiny, particularly given intensifying competition from Microsoft and Google. And it now seems that Apple has a lot to catch up on, which doesn’t bode well for investors.
Although the Services business has emerged as AAPL’s new cash cow, we believe Apple Intelligence’s underwhelming performance is a headwind for its product business (iPhone, iPad and Mac). Hence, we believe that Apple’s near-term growth prospects do not justify a premium valuation.
AAPL currently has a Zacks Rank #3 (Hold), suggesting that it may be wise to wait for a more favorable entry point in the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Apple Inc. (AAPL) : Free Stock Analysis Report
Netflix, Inc. (NFLX) : Free Stock Analysis Report
The Walt Disney Company (DIS) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research
