Despite underperforming its "Magnificent Seven" peers and the broader market in the first half of 2025, Apple (AAPL.US) staged a powerful 35% rebound in the second half following an 18% decline through June, achieving a net gain of over 11% for the year and outperforming the S&P 500 index and many large-cap tech stocks during the same period. This reversal was fueled by steadily accelerating sales of its core iPhone and Mac products, coupled with stable margin expansion driven by a favorable product mix, which partially offset the increase in operating expenses related to AI research and development. However, the stock's surge to a record high in the latter half of the year has left minimal room for error in the new year. While Apple still holds potential catalysts such as a more personalized Siri and a foldable iPhone 18, these are increasingly viewed as necessary moves to maintain competitiveness rather than disruptive drivers capable of significantly broadening its growth prospects. Furthermore, the current valuation premium does not yet fully reflect a series of imminent challenges. This article analyzes three direct risks that have not received sufficient attention.
The first challenge is the premature depletion of iPhone upgrade demand. Apple set an iPhone sales record in the September quarter, primarily driven by robust demand for the iPhone 16/17 series, with growth even being constrained by supply shortages. Management indicated that the growth guidance for the December quarter includes a significant amount of iPhone 17 backlog, suggesting an acceleration in growth. However, looking ahead to fiscal year 2026, the iPhone demand outlook is concerning. Although management downplayed the role of tariffs in pulling forward demand, major US carriers widely observed that device upgrade activity accelerated ahead of the typical autumn cycle following the announcement of tariff news in April. The redesigned iPhone 17 also successfully sparked consumer interest. Yet, these demand drivers are difficult to sustain. The upcoming foldable iPhone 18 is expected to struggle as a strong growth engine, with initial supply severely constrained and the foldable form factor yet to gain mainstream market favor. More importantly, a large replacement cycle originating from the iPhone 12 era, which was anticipated to be driven by AI features, showed tepid demand in early 2025 due to repeated delays in Apple's AI feature releases. Subsequently, tariff concerns ironically stimulated iPhone 16 upgrade demand in the second half of 2025. This implies that demand pulled forward by tariffs and the iPhone 17's design innovations may leave Apple facing difficult year-over-year comparisons in FY2026, with the risk of growth deceleration exacerbated by a diminishing effect from higher Average Selling Prices due to product mix changes.
The second challenge is the increasingly severe cost pressures. In fiscal 2025, Apple achieved profit growth that outpaced revenue growth, thanks to a favorable product mix, a trend management expects to continue in the short term. However, the scope for further margin expansion is limited and unlikely to fully offset the deterioration in the cost structure caused by multiple factors. Tariff risks, while currently manageable through proactive supply chain management and trade agreements, have not dissipated in the long term. Apple's efforts to diversify its supply chain are ongoing, but uncertainties in US-China trade relations, coupled with its reliance on tariff concessions tied to investment commitments for production in India, introduce variables into long-term costs. Rising material costs are another pressure point; aligning with a "Made in the USA" orientation, Apple is increasing production of key components (such as Corning glass and TSMC chips) in the US, which pushes costs higher. TSMC has already warned that its US factories will drag on margins. Simultaneously, industry-wide increases in raw material prices, especially for memory, pose significant pressure, with prices for LPDDR5X memory used in iPhones more than doubling over the past year. While Apple benefits from its scale, it is not entirely immune to market price fluctuations. Other pressures include the fact that although the higher-margin Services division continues to achieve strong margins, its normalization to low-to-mid-teens growth rates is unlikely to sufficiently counterbalance the product-side pressures discussed. This is evidenced by Apple observing only moderate consolidated margin expansion in recent quarters as Services growth and its share of consolidated revenue stabilize. With Apple also unlikely to significantly raise product prices, the means to maintain future margins are limited. A recent spate of high-profile talent departures further compounds this issue, including the senior vice president of Machine Learning and AI Strategy John Giannandrea, user interface design chief Alan Dye, and AI models team chief scientist Ruoming Pang. As Apple undergoes a continuous AI transformation and seeks to retain and acquire key talent, these departures collectively increase the risk of higher personnel costs, expected to further intensify the pressure from Apple's recently accelerated pace of AI R&D spending, which has already led to a rising trend in operating expenses, limiting future operational leverage improvement.
The third challenge is the potential impact of a major market "rotation." Beyond fundamental headwinds, a shift in market sentiment also threatens the sustainability of Apple's high valuation. Recent market gains have been primarily driven by non-tech sectors like healthcare, utilities, industrials, and energy, which lagged in the previous two years. The market anticipates that a sustained interest rate cutting cycle, aimed at stimulating the economy, will provide a broad tailwind for these sectors. This "great rotation" could not only cap the upside for the entire tech sector next year but also potentially reduce the preference for traditional "cash cow" defensive assets like Apple. Consequently, a broad adjustment in the valuation premiums enjoyed by large-cap tech stocks could expose Apple to the risk of short-term multiple compression.
In summary, the scope for the valuation to climb significantly higher from current levels is limited, while risks are accumulating. Apple's stock hitting a record high in the past six months reflects market confidence in its short-term execution and earnings stability, benefiting from a favorable product mix, strong iPhone momentum, and cost control. However, looking forward, the potential for a material upward revaluation from the current level appears constrained. Short-term tailwinds, such as pulled-forward iPhone demand and elevated Average Selling Prices, are expected to fade in FY2026. The company will also face an increasingly complex cost environment, including industry-wide macroeconomic uncertainties, rising material costs, and its own unique pressures from rising personnel and AI R&D expenses. Coupled with the new trend of potential capital rotation away from high-valuation tech stocks, market participants remain cautious about the durability of Apple's stock price near its current historic highs, as it has not yet fully priced in the multiple valuation compression risks that may emerge over the coming year.
Comments