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Commentary

Despite Near-Term Headwinds, We Still See a Shiny Apple

Although it faces near-term hurdles, the iPhone business and Apple's competitive position remain sound, and the shares are one of our best long-term tech investment ideas today.

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 Apple (AAPL) continues to face near-term macroeconomic and currency headwinds, reporting fiscal second-quarter results and providing investors with a third quarter outlook below our expectations on several fronts. Nonetheless, we think the iPhone business and iOS ecosystem remain structurally sound and don't believe that Apple's lack of growth points to a weakening competitive position or loss of customer loyalty.

We still foresee a rebound in revenue and iPhone unit sales, perhaps as soon as this Fall with the iPhone 7. Yet with shares trading as low as $96 after hours, we think Apple is priced as if the iPhone has already peaked and is facing a prolonged secular decline. While the iPhone no longer appears to be a high growth business for Apple, we continue to believe demand will remain more resilient than what the firm's stock price implies, as customer switching costs around the iOS ecosystem remain strong, in our view, and have the potential to expand over time. We will maintain our narrow moat rating and fair value estimate for the firm and continue to view Apple as one of our best long-term investment ideas within the tech sector.

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