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Market Update

Apple Dreams of an iPad Christmas

Apple's solid December-quarter outlook points to healthy demand for the company’s new iPhones and iPads, says Morningstar’s Brian Colello.

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 Apple's (AAPL) strong, fiscal fourth-quarter results came in ahead of both the Street's, and our own, expectations. More importantly, Apple's solid December-quarter outlook points to healthy demand for the company’s new iPhones and iPads. We're maintaining our $600-per-share fair value estimate, and our narrow economic moat rating.

For the September quarter, revenue of $37.5 billion and EPS of $8.26 also exceeded the company’s prior forecast. We suspect that the strong results were driven by a tremendous iPhone launch during the quarter's closing days. Apple’s iPhone unit sales held up well, at 33.8 million units, while a 1% sequential decline in the average selling price, or ASP, appears reasonable in light of Apple selling older iPhones during most of the reporting period. Apple's iPad unit sales and revenue declined modestly, but again pertains to the sale of older models, as customers likely pushed out new iPad purchases until the new lineup of tablets rolls out in November.

Apple’s strong outlook for the December quarter still points to robust ongoing iOS adoption, and we continue to view Apple's shares as modestly undervalued. We calculate that revenue in the range of $55 billion to $58 billion likely implies iPhone unit sales in the low-to-mid 50 million-unit range, ahead of unit sales of 47 million during last year's iPhone 5 launch. We attribute most of the projected unit growth to new carrier deals with  NTT DoCoMO (NTT) and  T-Mobile (TMUS), as well as launching iPhones in China a quarter earlier than usual. The guidance also hints at strong, but not exponential, iPad growth from new product launches, although even the company is unsure whether it can fulfill all iPad Mini demand this holiday season. Gross margin of 37% is a nice forecast, in our view, once adjusted upward by about 150 basis points for deferred revenue associated with free software giveaways.

Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.