Bernstein comments on Apple Inc. (AAPL.US) Q4 results: a choice for those looking to avoid AI trades, but not necessarily for those seeking a clear AI winner

Title context: Bernstein comments on Apple Inc. (AAPL.US) Q4 results: a choice for those looking to avoid AI trades, but not necessarily for those seeking a clear AI winner Text: In his first quarterly earnings report after John Ternus took over as CEO, his framing was that "Apple is the best company on earth." Bernstein's follow-up question: Is it the best stock on earth? The report's answer depends on what investors wantif they want to avoid AI trades without fully giving up tech exposure, while believing this global leading tech franchise is better positioned in AI than most fear, the answer may be yes; but if they are looking for a clearer near-term AI winner, Apple probably is not it. FQ4: Revenue and profit both beat, free cash flow the only miss Apple's fiscal Q4 2026 revenue was US$114.477 billion, up 12% year over year, 1.6% above Bernstein's estimate, 0.9% above consensus, and above the company's prior guidance range of 9% to 11%; diluted EPS was US$2.10, up 14% year over year, 6% above Bernstein and 5% above consensus. Gross margin was 47.9%, at the high end of the 47% to 48% guidance range, 36 basis points above both Bernstein and consensus; operating margin was 31.1%, 68 and 44 basis points above, respectively. By segment, iPhone revenue was US$57.6 billion, up 17% year over year, slightly above the company's "mid-teens" outlook, supported by demand for the iPhone 18 series; Mac revenue rose 24% year over year to US$10.8 billion; Greater China rose 21% year over year, with record iPhone upgraders. Services revenue rose 10% year over year to US$31.6 billion, absorbing about 2.5 percentage points of FX headwind, or about 12.5% growth excluding FX. The only item below consensus was cash flow: adjusted free cash flow was US$25.859 billion, 8.5% above Bernstein but about 19.2% below the market consensus of US$32.012 billion. The "like-for-like" truth about iPhone: total volume down, new models up The headline numbers understate the strength of new models due to staggered launch timing. Bernstein strips out base models (iPhone 17, Air, iPhone 16 and 16 Plus) in each period to construct a like-for-like basis: FQ4 total shipments were 55 million units, down 2% year over year, but excluding base models shipments were 38.854 million units, up about 6% year over year; total revenue rose 17.5% year over year, and excluding base models revenue was US$43.425 billion, up about 27% year over year. The increment was driven mainly by price and product mix rather than volume. December guidance: strong revenue, weak gross margin Apple guided December-quarter revenue up 7% to 10% year over year, above Bernstein's prior 4.3% estimate and consensus of 6.1%. At the 8.5% midpoint, services guidance is up 8% to 9% (8.5% midpoint), implying product revenue growth of also about 8.5% and iPhone revenue growth of about 9%. But this figure also understates upgrade strength: comparing the iPhone 18 Pro/Pro Max/Duo set with last year's iPhone 17 Pro/Pro Max, Bernstein's preliminary estimate is revenue growth of about 30% to 35%, above about 23% in FQ1'26. The Duo remains supply-constrained, and management did not provide a timeline for supply-demand normalization. On a like-for-like basis, December-quarter total shipments are expected to fall 15.5% year over year (due to the absence of a new base model and the high base from the iPhone 17 launch), but excluding base models shipments are expected to rise about 4% year over year and revenue about 30% to 35%. Management also noted that advanced-node capacity constraints are easing, leading Bernstein to see upside risk to its shipment forecast. Services growth drops to 8%9%: App Store and Google licensing take a double hit December services growth guidance of 8% to 9% is below market expectations of about 12% and decelerates from 10% in September. Management attributed this to third-party licensing revenue and about 50 basis points of incremental FX headwind. App Store revenue was roughly flat year over year in September due to weak mobile gaming and adjustments to App Store monetization rules; the company expects these headwinds to persist until year-over-year comparables normalize, but does not believe App Store growth will deteriorate further. Weakness in third-party licensing may be related to slower growth in Google search distribution paymentsGoogle search revenue growth has slowed from 17% in Q2 2026 to 12% in Q3. Support comes from more than 1.5 billion paid subscriptions and a continuously expanding active device base. Gross margin: memory price increases the main factor, and the 45%46% guidance is still "overstated" December gross margin guidance is 45% to 46%, even lower than Bernstein's already below-consensus 46.2%. The report had flagged before earnings that memory price increases could outweigh the benefits from improved high-end model mix and higher ASPs. Management said memory price increases were the main reason for the sequential decline, and memory prices will continue to rise after December, with the benefit of low-cost inventory gradually fading; pricing actions and non-memory cost cuts can only partially offset this. The rollout of Siri AI also brings two pressures: higher cloud inference spending within services costs, and more hardware revenue that must be deferred over the device's useful life. More importantly, Bernstein believes 45% to 46% itself overstates Apple's underlying gross marginthe guidance benefits from an unusually favorable high-end iPhone mix and low-cost memory inventory. If the base iPhone 18 had already been on sale in the quarter, estimated gross margin would be about 30 basis points lower, or a 45.2% midpoint. As memory costs continue to rise and the lower-priced iPhone 18e, expected to launch in spring, dilutes mix (especially in Q3), these one-time benefits will gradually fade. Bernstein has cut its iPhone gross margin forecast from 40.5% in FQ1'27 to 39% in the second half of fiscal 2027. Valuation: US$380 corresponds to 34x FY28, forward 35x above five-year average Bernstein cut fiscal 2027 and 2028 EPS by about 1% each to US$9.78 and US$11.13, and kept fiscal 2029 basically unchanged at US$12.43; revenue was raised 2%, but offset by lower gross margin and higher R&D expenses, with buybacks partially offsetting the net income impact. After adjustments, its fiscal 2028 and 2029 forecasts are 7% to 8% above consensus. The US$380 price target is based on 34x fiscal 2028 EPS (previously 33x), or 31.6x EV/FCF. The current forward P/E is 35.1x, significantly above the average of 22.7x since 2016, the three-year average of 30.0x and the five-year average of 28.2xthis is precisely the price gap between "the best company" and "the best stock."