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Apple Isn’t Rotting After All

We’re confident in our long-term view of Apple ahead of the crucial iPhone 7 launch.


 Apple (AAPL) reported fiscal third-quarter results and provided investors with a fourth-quarter outlook that were relatively in line with our expectations and perhaps were not as bad as initially feared by investors, with the stock up 7% in after-hours trading. We would still encourage investors to look forward to the iPhone 7 launch in September, rather than put too much emphasis on these near-term results which relate to aging products (albeit with some exceptions like the iPhone SE and iPad Pro). Nonetheless, we remain confident in our narrow economic moat rating and our long-term thesis that most of Apple’s iPhone customers today will continue to stick with the ecosystem (and buy future iPhones) going forward. We will maintain our $133 fair value estimate for Apple and continue to view the stock as one of our best long-term investment ideas within the tech sector.

Apple’s revenue in the June quarter was $42.4 billion, down 15% year over year but ahead of Street expectations. iPhone sales of 40.4 million units were also down 15% year over year. Although iPhone average selling prices, or ASPs, fell 10% year over year, Apple was encouraged by sales of its lower priced iPhone SE, as it believes it captured more switchers from Android than ever before (most likely such customers could not afford prior iPhone versions). Apple’s total gross margins fell 140 basis points sequentially, but the SE doesn’t appear to be a hefty drag on margins, as margins came in at the high end of prior guidance and favorable commodity pricing partially offset these headwinds.

iPad revenue was a bright spot, up 7% year-over-year, while ASPs rose 18% thanks to a richer mix toward the higher-priced, and recently released, iPad Pro. Services revenue continues to do well, up 19% year-over-year thanks to Apple’s larger installed base, but the firm noted that each customer, on average, spent more within the Apps Store this quarter than ever before, which bodes well for iOS engagement.

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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.