Apple Stock (AAPL) Feels the Weight of its Price Tag as Earnings Loom

Business Insider

3 days ago

Apple (AAPL) shares have been under pressure YTD, lagging behind the tech sector and the overall market. This seems to stem from its slowing growth and lofty valuation, which prevent the stock from breaking out higher. As market participants prepare for Apple's Q2 earnings to hit the market tomorrow, investors will be eyeing whether Apple's AI initiatives and services strength can offset concerns over modest growth and external pressures like tariffs.
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Going into today's trading session, Apple stock is already feeling the pressure as bearish sentiment is dominating. The stock is down 2.25% so far this week, although this could be a sign of things to come tomorrow, or an indication that Apple can spring to record highs close to $250 on the back of a strong earnings beat.
With a sky-high P/E and questions about Apple Intelligence's impact, the company needs a strong quarter to prove its premium multiple is warranted. Considering Apple's knockout earnings call record, there's little to suggest anything other than a rinse-and-repeat tomorrow, whereby Apple announces market-beating results and the market finds little to complain about. I remain Bullish on AAPL over the long term, but in the meantime, looking at the next few weeks, there is a case to be made for staying out of Apple stock altogether.
Recapping Apple's Q1 Performance
To recap Apple's previous quarter performance, made public in May, the company showed continued resilience, reporting $95.4 billion in revenue (up 5% YoY) and diluted EPS of $1.65 (up 8%). The standout was Services, which hit an all-time high of $26.6 billion—up 12%—driven by iCloud, Apple Music, and search licensing.
iPhone revenue rose 2% to $46.8 billion, while Mac and iPad sales climbed 7% and 15%, reaching $7.9 billion and $6.4 billion, respectively. Wearables, Home, and Accessories fell 5% to $7.5 billion, largely due to tough comps following the Vision Pro launch. Still, Apple maintained a strong gross margin of 47.1%, even with $900 million in projected tariff costs.
The quarter underscored Apple's strength in both services and hardware, with upcoming catalysts like the iPhone 16 and new Apple silicon-powered devices. CEO Tim Cook also highlighted Apple Intelligence—its new AI suite—as a major shift in user experience. With Wall Street now watching closely, Thursday's focus will likely center on AI's potential to drive future growth.
Key Factors to Watch at Tomorrow's Earnings Call
Wall Street anticipates Apple's revenue to land close to $89 billion, a 3.7% year-over-year increase, with EPS projected at $1.43, up 1.9% from $1.40 last year. These estimates align with Apple's guidance for low to mid-single-digit revenue growth and a gross margin of ~46%, factoring in tariff impacts.
Investors will also be focused on several key metrics. First, iPhone sales, expected at ~$43 billion, remain critical, with the iPhone 16's performance and early Apple Intelligence adoption under scrutiny. Second, Services growth, projected at mid-teens, will be monitored for continuing momentum, particularly in subscriptions and App Store revenue. Third, Greater China sales, which dipped to $16 billion in Q2, are a concern amid competitive pressures; analysts hope for stabilization or growth.
Finally, updates on Apple Intelligence rollout and CAPEX plans, predicted at $2.5 billion (up 16%), will signal AI investment intensity. Tariff impacts, estimated at $900 million, and regulatory risks, including a potential $12.5 billion hit from the Google search deal, are also some factors to keep an eye on.
It's worth noting that Apple's consistent track record (having beaten EPS estimates in each of the last nine quarters and revenue estimates in each of the last five) suggests the tech juggernaut may be poised to deliver even stronger results.
AAPL's Premium Multiple Has Much to Prove
Apple's valuation is a sticking point. At a forward P/E of over 29, I believe the stock is trading at a notable premium compared to both the overall tech sector and its mega-cap peers. Last quarter's 8% growth in EPS and this upcoming quarter's low-single-digit growth estimate can't possibly support such a high multiple.
Meanwhile, Wall Street's 5-year EPS CAGR estimate stands at a more exciting ~11%, but still, such growth would probably be enough for the stock to grow into its valuation, but not necessarily achieve strong medium-term returns.
For context, Meta Platforms (META) is reporting its Q2 results after today's trading close, trades at a similar P/E, yet has grown its EPS by 35%+ historically and 37% in Q1 alone, which clearly shows the premium that AAPL stock is carrying. More importantly, any EPS misses would likely cause a notable sentiment shift, further pressuring Apple's share price. Thus, I believe investors don't get a wide safety net at today's valuation. Apple has much to prove to convince me it deserves its current forward P/E.
Is AAPL a Good Stock to Buy?
There are 26 analysts offering price targets on AAPL stock via TipRanks. Today, the stock carries a Moderate Buy consensus rating based on 13 Buy, 12 Hold, and one Sell ratings over the past three months. At $228.11, AAPL's average stock target implies a ~8% upside over the next twelve months.
Apple Can't Afford to Coast Anymore
In short, Apple remains a powerhouse—but expectations are sky-high. With modest growth, rising external risks, and a premium valuation, there's little room for a soft quarter. FQ3 will need to show continued strength in services and early momentum from Apple Intelligence to justify the stock's price tag. Without an apparent acceleration in earnings or narrative, outperformance may prove elusive. Investors should tread carefully. Apple's consistency is impressive, but at this valuation, consistency alone isn't enough.