According to the financial news app, Zhitong Finance, Apple (AAPL.US) announced revenue of $85.8 billion for the third quarter of the fiscal year 2024. Not only did it grow by 5% compared to the same period last year, but it also exceeded the general expectation of $84.4 billion. Considering that the entire growth happened in Apple's weakest quarter, this is particularly noteworthy. Thanks to its operational leverage, AAPL achieved a GAAP earnings per share of $1.4, an 11% increase compared to the same period last year, and surpassing the general expectation of $1.34 per share (although it decreased by approximately $0.13 compared to the previous quarter). The better-than-expected performance and no major negative guidance changes resulted in the revision of fourth-quarter earnings.

Apple's expansion strategy in terms of geography has indeed proven to be effective, as seen from the record-breaking revenue generated in over twenty countries, including major terminal markets such as Canada, Mexico, Germany, and the United Kingdom, as well as emerging economies such as Indonesia, the Philippines, and Thailand. It is these markets that helped offset the decline in sales in the Chinese market (a 7% decrease compared to the same period last year), which was expected due to 'economic and competitive pressures.' Apple's sales in the Americas (a 7% increase compared to the same period last year) and Europe (an 8% increase compared to the same period last year) have both grown, allowing the company to continue capitalizing on diverse market opportunities. The company's services division achieved record revenue of approximately $24.2 billion, a 14% increase compared to the same period last year, further reducing reliance on hardware cyclicality, which is certainly good news for investors.

Despite a slight decrease in market share from 16.6% in the same period last year to 15.8%, Apple still maintains its leading position in terms of global smartphone revenue and profit share. The iPhone generated $39.3 billion in revenue, accounting for 46% of total sales, a slight decrease compared to the same period last year, but less than 1%. In addition, Mac sales increased (revenue of $7 billion, a 3% increase compared to the same period last year) and iPad sales (a 24% increase to $7.2 billion), indicating Apple's strength in the computing field.

However, the financial data for the third quarter has become history. Regardless, as Apple holds its annual product launch event, these figures quickly fade from view as the focus of the event, as always, is centered around the iPhone.

Although there were no major surprises, this event provided important details about the launch of Apple Intelligence, iPhone pricing, and the new Visual Intelligence feature. According to analysts from Morgan Stanley, in their recent research report, Apple plans to introduce Apple Intelligence to approximately 40% of the iPhone installed base by the end of this year, and it will surpass 70% by the end of next year. This aligns with the initial market expectations and indicates a slightly faster rollout pace. They add that the '70% installed base' could drive upgrades faster than expected, as consumers may choose to use their devices 'future-proof' themselves for these new features.

iOS 18 promises to make the iPhone more personalized and intelligent, which may drive future sales - at least at first glance, this is true. The Apple Intelligence tool suite should focus on 4 use cases:

Expression (new writing tools, emojis);

Revisit memories (enhanced photo capture and editing capabilities);

Priority and focus (email/notification summaries);

Command/control (updated Siri, better natural language processing, new settings and feature knowledge, new personal environment).

In a survey by AlphaWise Survey (a proprietary source owned by Morgan Stanley) in the United States, about 60% of iPhone users who plan to upgrade in the next 12 months indicated that Apple Intelligence is crucial to their decision. Analysts conclude that this "illustrates the importance of Apple Intelligence to the iPhone 16 upgrade", but those who plan to upgrade their iPhone will do so regardless of whether or not the Apple Intelligence feature is available.

Now, what really matters to the market's further response to the iPhone 16 is early pre-order data and the subsequent launch of Apple Intelligence.

According to Argus Research analyst's report in August, although the company may currently lag behind peers such as Google, Microsoft, and Meta in AI development, its focus on privacy and device processing capabilities may become a significant differentiating factor in the long run. From a perspective of technological innovation, the analyst has some doubts about the new features of Apple Intelligence and is concerned about the long-term downward trend in mobile carrier upgrade rates (postpaid upgrade rates) that has been observed for several years.

These data indicate that people are keeping their devices for longer: whether it is for economic reasons, satisfaction with existing technology, or a lack of compelling new features in the latest models. However, this trend itself is not healthy for Apple. The chart above indicates that Apple's seasonal sales data should improve soon, but it remains to be seen whether Apple Intelligence is enough to be a sufficient reason for consumers to upgrade their devices. But results will be seen soon.

Now, let's talk about Apple's valuation. The company's capital return strategy, which includes a large-scale share buyback authorization of $110 billion and systematic dividend increases (recently increased by 4% to $0.25 per share), is helping create shareholder value and valuation premium. However, the P/E ratio has expanded too much.

Even without knowing Apple's exact P/E ratio, the company has been generating positive cash flow for many years, so it can be valued using DCF (Discounted Cash Flow) analysis.

Regardless, analysts have added a significant premium to the sales figures for each projected year and maintained a forecasted pre-tax profit margin of over 32% for the period of 2026-2028. Other driving assumptions have been kept as default values, reflecting long-term averages. The following are the results obtained from the operating model:

Assuming a debt cost of 4% (with a risk-free rate of 3.5%, thus a minimal interest rate spread) and an MRP of 5%, as commonly done when evaluating any company. As a result, the calculated WACC is 9.5%, which is an appropriate discount rate under current conditions.

Apple's current EV/FCF (price-to-free cash flow) ratio is approximately 32.45 times, more than 65% above its 10-year average level. It is expected that by the end of fiscal year 2028, this multiple will decrease to at least 30 times, returning somewhat to the mean.

Considering all these factors, the fair value of Apple's stocks has been determined, taking into account all the optimistic assumptions, which limits its intrinsic growth potential.

The recent release of Apple Intelligence by Apple has aroused great interest from investors and users, but it is currently unclear how this will affect upgrades and expected sales data. It remains to be seen how much this will change Apple's game rules until the pre-sale data (delivery time) is known. But the stagnant momentum of post-paid upgrade rates looks a bit scary.

The DCF valuation model suggests that even with a meaningful premium on Apple's consistent revenue figures and profit margins, the stock can only get a fair valuation at most.