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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.


 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.

Apple's revenue in the March quarter was $50.6 billion, down 13% year over year, which is the first quarterly revenue decline for the company since 2003. iPhone unit sales of 51.2 million were down 16% year over year; Apple cited softness in China and other emerging markets, but we also suspect Apple faced weakness in the U.S. and Europe as well. iPhone average selling prices fell 7% sequentially, which does not include any impact from the firm’s new $399 iPhone SE, but does reflect currency headwinds from a strong U.S. dollar and a less favorable product mix toward older phone models. Mac revenue fell 9% year over year, appearing to barely outperform the rest of the sluggish PC industry, while revenue from Other Products (including Apple Watch) of $2.2 billion was also noticeably below our prior estimates.

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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.