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Apple Is Bruised but Not Rotten

Despite headwinds, we still don't see any long-term structural problems, such as market share loss or a lack of innovation, around the firm's core business.


 Apple's (AAPL) fiscal first quarter results and second-quarter outlook painted a gloomy picture in terms of currency headwinds and sluggish macroeconomic conditions, but  Our long-term thesis and narrow economic moat rating for Apple remain intact. We will likely cut our fair value estimate for Apple by about 5%, as near-term iPhone unit sales and Apple Watch revenue are poised to come in below our prior projections. Yet we still view Apple as one of our better long-term investment ideas within Tech, as the market still appears to be pricing Apple as if iPhone sales are is in secular decline. We think this bearish scenario is unlikely as we don’t see a premium "iPhone killer" on the market, all while customer satisfaction remains high and Apple continues to attract switchers away from Android. iPhone replacement cycles are likely lengthening due to macroeconomic issues, but we think that sets Apple up nicely for a bounce back in iPhone sales at some point if the macro picture improves or, more important, the firm delivers on innovative new features within future iPhones.

Apple’s total revenue in the December quarter was $75.9 billion, up 2% year over year but at the low end of the firm’s previously forecast range, a rare miss by the firm. Revenue would have been up to $80.8 billion, up 8% year over year, on a constant currency basis. Apple sold 74.8 million iPhones in the December quarter, up by only 311,000 units or 0.4% year over year, with sales actually down on a sell-through basis to end customers. On the bright side, iPhone average selling prices were still spectacular at $691 per phone, up 3% sequentially, despite $49 of negative currency effects. We estimate that Apple sold about 5.5 million Watches in the quarter, which, if accurate, was softer than the sort of exponential growth we were previously expecting.

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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.