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Stock Strategist

Apple Sell-Off Looks Overdone

We're looking past supply chain jitters and maintaining our valuation.

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 Apple's (AAPL) shares have faced pressure as a variety of reports and, more important, a couple of the firm's component suppliers have suggested that inventory corrections are taking place as iPhone 6s and 6s Plus sales are not living up to the company's estimates. A clear takeaway, in our view, is that strong quarterly revenue beats for the December and March quarters, which Apple has routinely generated, are probably off the table with the 6s launch. Yet we still see a scenario where iPhone unit sales are able to meet our estimates despite grim production cuts, depending on how overly optimistic Apple may have been when building for its 6s launch. We still project that iPhone unit sales will be in the high-70 million range for the December quarter, which would represent modest growth from the year-ago quarter. However, iPhone unit sales for the March quarter, which would rely on Chinese New Year spending, look shakier and may in fact decline year over year (we currently model slight growth).

We still see little evidence of share erosion for Apple at the high end of the market, and any shortfall in sales may stem from sluggish macroeconomic conditions or longer replacement cycles as iOS users delay upgrades. Either of these factors could lead to pent-up demand for new iPhones later this year or beyond. We consider Apple's competitive position in mobile computing to be as strong as ever, yet shares around $100 are priced as if the iPhone will never grow again, which we think is possible but unlikely as we see the iOS ecosystem creating customer stickiness. We are maintaining our $140 fair value estimate for Apple and consider it one of the better investment ideas in technology. We will update our valuation after the firm's fiscal first-quarter earnings report scheduled for Jan. 26, which may confirm or refute our near-term thesis. We are maintaining our narrow moat rating.

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