Apple Q3 Earnings Preview: Will AI Elevate iPhone Maker's Stock?

As Apple Inc AAPL gears up for its Q3 2024 earnings report, all eyes are on Cupertino, California.

According to JPMorgan analyst Samik Chatterjee, Apple is not just coasting on its past success but gearing up for a thrilling AI-driven future that could propel its stock to new heights.

Chatterjee has placed Apple on a ‘Positive Catalyst Watch,’ raising the price target to $265 by December 2025, up from the previous $245 for December 2024.

So, what's behind this optimistic outlook? Let's dive into the details.

AI is Apple’s Next Ace

According to Chatterjee, Apple is in a strong position to leverage this upcoming AI cycle, particularly through its iPhone and overall revenue performance.

"We expect Apple to reassure investors that the upcoming AI replacement cycle earmarked to begin in earnest in FY25 (Sep-end), and step-up further into FY26, is leveraging a more robust launchpad in FY24 with better than expected revenue drivers," says Chatterjee.

He expects a revenue beat for both iPhone sales and the company’s total revenue, which could ease investor concerns about Apple’s premium valuation multiple. For the third quarter, Chatterjee anticipates Apple’s revenue to reach $85.3 billion, slightly above the consensus of $84.3 billion. Earnings per share are expected to be $1.38, compared to the consensus of $1.34.

iPhone To Be Key Apple Earnings’ Driver

Notably, the iPhone is projected to be a key driver of this performance, with estimated sales of approximately 44 million units, leading to $39.9 billion in revenue, surpassing the consensus of $38.9 billion. Strong performance in China and other key regions is expected to contribute significantly to these numbers.

Looking ahead to the fourth quarter, Chatterjee forecasts revenue of $95.5 billion and earnings per share of $1.62, both ahead of the consensus estimates. This projection marks the second consecutive quarter of year-over-year revenue growth, following a decline earlier this year.

The iPhone, Services, and Mac segments are expected to lead the charge, while the Wearables, Home, and Accessories segment might experience some decline.

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Apple’s AI Cycle: Underestimated or Overlooked?

While Apple’s stock has rallied in recent months, Chatterjee sees room for further upside. He believes that the AI cycle presents untapped opportunities, particularly in improving margins, increasing iPhone volumes, and potentially extending the replacement cycle beyond FY26.

Chatterjee believes there is untapped potential within Apple’s AI strategy. He outlines three key areas that investors might be underestimating:

1. Margin Boost: The preference for premium iPhones among early adopters has historically led to impressive gross margin improvements, and this trend could continue despite investor concerns about component costs.
   
2. Volume Expansion: The AI-driven upgrade cycle is not confined to North America. Apple's reach could extend globally, driving volumes beyond expectations and marking a departure from the patterns seen in the 5G cycle.
   
3. Prolonged Growth: With leading-edge AI features slated for iPhones post-FY26, Apple might witness an extended period of growth, possibly outstripping current expectations.

As Chatterjee states, “Our Dec-2025 price target of $265 only assumes a 26x earnings multiple on CY26 estimates as they already embed the tailwinds of the AI replacement cycle.”

With these factors in play, Apple’s upcoming earnings release could be the spark needed to propel its stock to new heights.

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