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Undervalued Apple Still Shines

Strong underlying demand for Apple products puts 2016 on track to be another growth year, writes Morningstar’s Brian Colello.


 Apple (AAPL) reported solid fiscal fourth-quarter results which were modestly ahead of our expectations. However, more important, although Apple's forecast for the all-important December quarter was modestly below our expectations as a result of currency headwinds, underlying demand for Apple's products remain strong and the company isn’t seeing any ill effects from a slowing Chinese economy. Our long-term thesis for Apple remains intact, as does our near-term outlook that fiscal 2016 will still be a growth year for the company. We will maintain our $140 fair value estimate and narrow moat rating for Apple. With shares trading around $115 after hours, we still view Apple as undervalued and consider it to be one of our better investment ideas in technology.

Apple sold 48 million iPhones in the September quarter, up 22% from the year-ago quarter. More impressive, iPhone average selling prices rose 2% sequentially to $670, as the firm continues to sell higher-priced "Plus" models and iPhones with increased storage capacity. iPhone unit sales in greater China were up 87% year over year, and Apple saw no major signs of economic deceleration in the region. Total revenue from Other Products was $3.0 billion, up 15% sequentially, which we think only implies modest revenue growth from the Apple Watch. We remain optimistic that the device will take off at some point, especially as customer satisfaction metrics (per Wristly) are encouraging.

Apple's revenue forecast for the December quarter is in the range of $75.5-$77.5 billion, which would represent only 1%-4% year-over-year growth. However, Apple expects its topline to be hindered by more than $5 billion of negative currency effects in the period. On a constant currency basis, Apple foresees 8%-11% growth. Combined with Apple seeing more switchers from Android than at any point during the past three-plus years, we still think that Apple's competitive position remains as strong as ever.

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