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Apple: Bright Future, Fairly Valued Shares

A tremendous iPhone launch and impressive emerging-markets Mac sales bode well for the firm’s future, but the market fully appreciates that strength today, says Morningstar’s Brian Colello.


Brian Colello: Apple (AAPL) reported fourth-quarter earnings today, and the results were quite strong. IPhone revenue was up 21%; Mac revenue was up 18%. It was really a great quarter on the product front. It's actually very impressive. They also bought back $17 billion of stock. So, from the fourth-quarter perspective, results were really strong.

The more important news for investors was the Q1 forecast, and that came in relatively in line with expectations. Revenue was guided higher than what the Street was expecting. It points to a really strong iPhone launch. That should continue into the December quarter. Mac sales still appear to be very strong, especially the growth in emerging markets. So, on the top line, Apple still appears to be doing really well.

The problem or maybe the downside to it is that gross margins are still relatively in line with last quarter. They are not getting as much of a lift from selling these higher-priced phones. They're still costlier screens and more memory going into them, and so that weighs on earnings a little bit. They are also spending a bit more, it appears, on [research and development]--which is not the worst way to spend cash, but that will weigh on earnings in the December quarter. And so, [earnings per share] was really in line with expectations. I think that's implied with the fact that the stock is only up about 1% after hours. So really, that guidance, which could move the stock one way or another if it was really good or really bad, pretty much came in as expected.

Longer term, we think Apple's future is still bright. They are looking at a tremendous iPhone launch for the December quarter, and the Mac growth is really impressive, especially in emerging markets. And it's very important about Apple in the long term when we think about their economic moat, how important it is for iPhone owners to own multiple Apple devices makes it less likely for these customers to switch to Android or another platform. Mac really accentuates that. So, the more Mac sales they can get to tie the whole ecosystem together will be really impressive.

We still like Apple as a company. We still think the future is bright. We think valuation is pretty much in line with where the market is at. We think the easy money has been made with the big run up over the past six months; but at current prices, we think that price is about justified at this point.

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