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Apple Looks Undervalued as It Tunes Up Lineup

We still see Apple as one of the better ideas in the tech sector as the firm shifts its product portfolio, writes Morningstar's Brian Colello.


In our view, a shifting product portfolio was the highlight of  Apple’s (AAPL) March product event, as the firm has taken an aggressive pricing stance on some products (iPhone SE and Apple Watch) while pushing other devices (9.7-inch iPad Pro) further into the premium tier. We will incorporate Apple’s new product and pricing mix into our valuation model, but we do not expect to revise our $133 fair value estimate. Ultimately, we anticipate that any near-term increase in iPhone unit sales from the SE might be offset by relatively softer pricing and gross margins as a result of a shift in product mix. With the shares trading around $105, we still consider Apple to be one of the better investment ideas in the tech sector. We are also maintaining our narrow moat rating for the firm.

Apple’s event brought three main adjustments to the firm’s product lineup. Most important, Apple launched the iPhone SE, with a 4-inch screen similar to the two-year-old iPhone 5s, but with many updated components comparable to the latest iPhone 6s. We’re a bit surprised by Apple’s aggressive pricing of the SE at $399, $50 lower than all prior entry-level iPhones, such as the 5s. The SE should make Apple more competitive in the midtier, as emerging-market customers, in particular, may be happy with a smaller screen that carries the Apple brand and iOS ecosystem over high-quality Android phones from firms like Xiaomi.

Apple also introduced a 9.7-inch iPad Pro, positioning it as more than a consumer product, but more as a PC replacement. The $599 starting price is $100 higher than all prior iPad (non-Pro) introductory prices. Again, we think that most iPad Pro sales will be made to those that were likely to buy other iPads or Macs anyway. Finally, Apple announced a $50 price cut for the Watch Sport, down to $299. We suspect that the price cut is not only an attempt to drive demand for the new product category, but also for clearing out inventory before a new device launch later this year.

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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.