Apple Comes Out From Behind to Emerge as An AI-Services Leader

Key Points

• Apple's record Q1 was underpinned by solid growth in the services business and highlights the long-term growth opportunity.
• High-margin AI services and apps are expected to grow at double-digit CAGRs for the next decade.
• Analysts expressed caution after the release but remain bullish on the market and are lifting their price targets. 

Arguably late to the AI game, Apple’s NASDAQ: AAPL understated push into AI has it set up to grow substantially over the next decade. Ultimately, it won’t be about the flashiness of the AI product or launch, but its durability, and Apple has proven to be a durable business. The company commands over 28% of the global mobile market, tied to its ecosystem and AI products, and is well-positioned to capitalize on it. 

The outlook for AI services growth is robust. The AI services market is expected to grow at a nearly 30% CAGR for the next decade and drive growth across the technology industry. Within that, the app market, about 20% of Apple’s business, is forecasted to increase by 18%, led by personalized AI assistants and business automation. Business apps, which account for about 10% of the Appstore apps, will also be a significant driver. As for Apple, it will continue to take the 30% share of the app and in-app purchases that it has. 

Apple’s first major release is Apple Intelligence, a generative AI-assist feature available across the ecosystem. Significant features include personalization (critical for widespread adoption), data capture, app function, and email generation.

Apple’s Record Q1 Underpinned by Services Growth

Apple had a solid FQ1, with revenue reaching a record $124.3 billion, up 4% year over year and better than MarketBeat’s forecasted consensus. Strength was driven by all geographies, including the Americas, Europe, and Asia/Pacific, with solid double-digit growth in Mac, iPad, and services offsetting weaker phone sales. Phone sales were impacted by increased competition, primarily in China, which some analysts linked to the slower-than-expected rollout of significant AI features.

The margin news is also impressive, with mix and leverage aiding a substantial gross margin and bottom-line result. Gross margin came in at 46.9%, up 100 basis points yearly, driving a 10% increase in GAAP EPS and EPS above forecasts. Guidance is also favorable, with the company reiterating an expectation for growth in FQ2 despite fears to the contrary. The company targets low-to-mid single-digit top-line growth and wider margins, with GAAP earnings forecasted in the low-double-digit range. 

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Analysts expressed some caution following the FQ1 2025 earnings release, primarily concerned with slowing China sales and weak iPhone growth, but the response is favorable to investors and the stock’s price. The strength in services and outlook for services growth overshadowed the bad news, leading to numerous price target increases. MarketBeat tracks nine revisions in the first days following the release, including two reiterations and seven price target increases. The net result is a 2% increase in the consensus estimate, an indication of at least a 7% upside from critical support targets, and a growing likelihood that the market will move to the high-end range near $300 or higher by year’s end. 

Institutional Activity May Cap Apple Stock Gains in H2 2025

Although institutional activity in Apple’s stock is generally positive, the first indications in 2025 are bearish and suggest a market top is in place. Institutional activity in January was relatively light, but selling outpaced buying by nearly three-to-one, providing a significant headwind for share prices. The critical resistance point is near the $247.75 level. 

The January price action is mixed with both support and resistance indicated. The takeaway is that a market squeeze is underway, with long-term proponents on one side and naysayers on the other. Critical support for H1 2025  is at the 150-day EMA; if it holds, AAPL stock could set a new high in the first half. If not, Apple’s market will remain range-bound, potentially retreating as far as the $200 level before rebounding and setting new highs.