Bernstein comments on Apple's (AAPL.US) Q4 performance: If you want to avoid AI trading options, you don't have to do it if you want to find a clear AI winner

The Zhitong Finance App learned that John Ternus (John Ternus)'s first quarterly earnings report after becoming CEO, he set the tone “Apple is the best company on Earth.” Bernstein's question is: is it the best stock on the planet? The report's answer depends on what investors want — if they want to avoid AI deals, and are unwilling to completely give up exposure to tech stocks, and believe that the world-leading tech franchise is in a better position than most people worry about, the answer is probably yes; but if they want to find a more clear AI winner in the short term, Apple probably isn't.

FQ4: Revenue and profit both exceeded, and free cash flow was the only failure

Apple's revenue for the fourth quarter of fiscal year 2026 was US$114.477 billion, up 12% year on year, 1.6% higher than Bernstein's forecast and 0.9% higher than the market consensus. It also exceeded the company's previous guidance range of 9% to 11%; diluted earnings per share were $2.10, up 14% year over year, 6% higher than Bernstein's consensus and 5% higher than consensus. The gross profit margin was 47.9%, at the high end of the 47% to 48% guidance range, 36 basis points higher than Bernstein and consensus, respectively; the operating profit margin was 31.1%, 68 and 44 basis points higher, respectively.

Structurally, iPhone revenue was 57.6 billion US dollars, up 17% year over year, slightly higher than the company's “middle double digit” forecast, supported by demand for the iPhone 18 series; Mac revenue increased 24% year over year to 10.8 billion US dollars; Greater China increased 21% year over year, and iPhone switch users set a record. Service revenue increased 10% year over year to US$316 billion, during which time it withstood exchange headwinds of about 2.5 percentage points, and the growth rate after excluding exchange was about 12.5%.

The only thing below consensus was cash flow: adjusted free cash flow of $25.859 billion, higher than Bernstein's 8.5%, but about 19.2% lower than the market consensus of $32.012 billion.

The truth about the iPhone's “same caliber”: the total quantity is declining, and the new models are on the rise

Surface figures underestimate the strength of the new model due to a misaligned pace of launch. Bernstein excluded basic models (iPhone 17, Air, iPhone 16, and 16 Plus) in each phase to build the same caliber: total FQ4 shipments were 55 million units, down 2% year on year, but after excluding the basic model, 388.54 million units were shipped, up about 6% year on year; total revenue increased 17.5% year on year, and revenue after excluding basic models was 43.425 billion US dollars, up about 27% year on year. Increment is mainly driven by price and product structure rather than sales volume.

December Guidance: Strong Revenue, Weak Gross Profit

Apple indicated a 7% to 10% year-on-year increase in revenue for the December quarter, higher than Bernstein's previous 4.3% forecast and 6.1% market consensus. According to the median value of 8.5%, the service guide increased by 8% to 9% (median value of 8.5%). The implied product revenue growth rate was also about 8.5%, and the iPhone revenue growth rate was about 9%. However, this figure also underestimates the switching intensity: comparing the iPhone 18 Pro/Pro Max/Duo with last year's iPhone 17 Pro/Pro Max, Bernstein initially estimated the revenue growth rate was about 30% to 35%, higher than the FQ1'26's about 23%. Duo is currently still subject to supply constraints, and management has failed to give a timeline for normalizing supply and demand.

At the same level, total shipments for the December quarter are expected to drop 15.5% year on year (due to lack of new basic models, forming a high base with the iPhone 17 launch), but after excluding basic models, shipments are expected to increase by about 4% year on year, and revenue is expected to increase by about 30% to 35%. Management also mentioned that advanced process capacity constraints are being eased, so Bernstein believes that there is an upward risk in its shipping forecast.

Service growth rate dropped to 8% — 9%: App Store and Google Authorize Double Click

The December service growth guide was 8% to 9%, lower than the market's forecast of about 12%, and also decelerated from 10% in September. Management attributed third-party authorized revenue and an incremental exchange headwind of approximately 50 basis points. App Store revenue was roughly flat year over year in September due to weak mobile games and adjustments to App Store monetization rules; the company expects these headwinds to continue until the year-on-year base is normalized, but the App Store growth rate is not expected to deteriorate further. Weak third-party licensing may be linked to a slowdown in Google Search distribution payments growth — Google search revenue growth fell from 17% in the second quarter of 2026 to 12% in the third quarter. Supported by more than 1.5 billion paid subscriptions and a continuously expanding active device base.

Gross profit margin: the increase in storage prices is the main reason, and the 45% to 46% guideline is still “overestimated”

The December gross margin guide is 45% to 46%, which is lower than Bernstein's already lower than the consensus of 46.2%. Prior to the financial report, the report indicated that the increase in storage prices may outweigh the benefits brought by structural improvements and ASP improvements in high-end models.

Management said that the increase in storage prices was the main reason for the month-on-month decline, and storage prices will continue to rise after December, and the dividends from low-cost inventory will gradually subside; the pricing action can only partially offset the reduction in non-storage costs. The implementation of Siri AI has also brought double pressure: rising cloud-based inference spending in service costs, and the need to defer confirmation of more hardware revenue over the life of the device.

More importantly, Bernstein believes that 45% to 46% itself overestimates Apple's basic gross margin — a guideline benefiting from an unusually favorable high-end iPhone structure and low-cost storage inventory. If the basic model of the iPhone 18 were already on sale in the current quarter, the estimated gross margin would be about 30 basis points lower, or the median value of 45.2%. As storage costs continue to rise and the iPhone 18e dilution structure for the lower-cost model expected to launch in spring (especially in the third quarter), these one-time benefits will gradually subside. Bernstein has lowered the iPhone gross margin forecast from 40.5% in FQ1'27 to 39% in the second half of fiscal year 2027.

Valuation: $380 corresponds to 34 times FY28, and the outlook is 35 times higher than the five-year average

Bernstein cut earnings per share for the 2027 and 2028 fiscal years by about 1% to 9.78 and 11.13 US dollars, respectively, and remained basically $12.43 in fiscal year 2029; revenue increased by 2%, but was offset by falling gross margin and rising R&D expenses, and the buyback portion hedged the impact on net profit. After adjustment, its forecast for the 2028 and 2029 fiscal years was 7% to 8% higher than the market consensus.

The target price of $380 is based on 34 times FY2028 earnings per share (previously 33 times), or 31.6 times EV/FCF. The current forward-looking price-earnings ratio of 35.1 times is significantly higher than the average of 22.7 times since 2016, the average of 30.0 times in the past three years, and 28.2 times the five-year average — this is where the difference between the “best company” and the “best stock” lies.