The Services segment also deserves special attention, as it has clearly been the company’s main growth driver over the past three months. The segment generated $24 billion in revenue, a 14% increase year-over-year. This growth is particularly significant when considering the margins: Services had a 74% gross margin compared to 35.3% for products. As Apple’s hardware base expands, Services revenue continues to hit new highs, boosting overall profitability.

Despite the strong momentum in AAPL shares, I remain neutral ahead of Apple’s October 31 earnings report. Part of my concern lies in the optimism among analysts, with 21 out of 26 raising EPS estimates and 20 out of 25 boosting revenue projections over the past three months.

To beat expectations, Apple must surpass an EPS of $1.59—indicating 6% year-over-year growth—and report revenues above $94.33 billion, a 5% increase. However, analysts expect the following quarters to see even more growth, which adds pressure on the company to deliver results.

Considering short-term stock movements, while the iPhone 16 and 16 Plus, both capable of running artificial intelligence (AI), should be the company’s next growth drivers, so far, sales have been lackluster. Initial sales of 37 million units fell 12.7% below the iPhone 15’s launch figures. However, a recent report showed that iPhone sales in China have surged 20% in the first three weeks, offering a more positive outlook.

I believe, however, that it may still be too early to make any deeper analysis, considering that the full potential of the iPhone 16 may not be realized until more AI features become available, delaying any AI-driven super cycle.

Beyond the iPhone, I see performance in the China region as quite important. In the last nine months, Apple has seen sales in China fall by 9.6%, reflecting the ongoing struggles in the region, where it is rapidly losing market share to local competitors. Although the trend is that the iPhone 16 demand should pick up again, there likely won’t be any major breakthroughs in the fourth quarter.

The primary reason for market skepticism about Apple today is, arguably, its valuation. While this premium is supported by the company’s high-quality business, Apple remains heavily reliant on the iPhone, which made up over 50% of total revenue last year. On the other hand, the highly profitable Services segment, benefiting from an installed base of 2.2 billion devices, now accounts for nearly one-third of Apple’s revenue (28% in FQ3). This segment boasts strong margins and has been essential in sustaining the valuation premium.

That said, analysts expect Apple’s Fiscal 2024 EPS to grow by only 9% year-over-year, with growth rates not exceeding 12% through Fiscal 2026. Consequently, Apple trades at a forward P/E ratio of 35x, significantly higher than its five-year average of around 24x. Even when adjusting for growth—with a projected CAGR of 9.4% over the next three to five years—the resulting PEG ratio of 3.7x is nearly 50% above its historical average and almost three times higher than Nvidia’s (NVDA), making this multiple increasingly difficult to justify.

While long-term investors may not be overly concerned, given Apple’s exceptional cash generation and strong returns on capital, this valuation could contribute to short-term volatility, particularly as the market focuses on near-term results in a rapidly evolving AI-driven environment.

At TipRanks, the Wall Street consensus on AAPL is a Moderate Buy, consisting of 23 Buys, 10 Holds, and one Sell. The average price target is $248.34, implying a 8.16% upside potential ahead.

See more AAPL analyst ratings

I have a Hold rating on Apple ahead of its upcoming earnings, reflecting a cautious outlook due to Wall Street’s high confidence in beating estimates during what is expected to be a low-growth quarter. The impact of the AI supercycle is likely to become clearer in Fiscal 2025.

Additionally, keep an eye on stronger-than-expected numbers from China, as they could be pivotal for the region. That said, stretched valuations add an extra layer of caution, leaving little room for setbacks.

Disclosure