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Stock Analyst Update

New Products Reinforce Apple's Appeal

With solid if not revolutionary improvements to the iPhone and the Apple Watch, this narrow-moat company remains one of the better investment ideas in tech.


On Wednesday,  Apple (AAPL) launched the iPhone 7 and 7 Plus, along with the Apple Watch Series 2, both of which carried a host of hardware upgrades from prior versions but neither of which included a revolutionary enhancement that is likely to spur a massive wave of upgrades, in our view. Nonetheless, we see solid improvements in the iPhone in particular, while we think Apple is handling the transition to an iPhone without a traditional 3.5 millimeter audio jack rather nicely. When combined with switching costs around the iOS ecosystem, we continue to believe most iPhone customers today will continue to buy iPhones well into the future. Meanwhile, expansion of Apple’s iPhone upgrade program into the U.K. and China could serve the firm well as it attempts to combat lengthening replacement cycles. We maintain our $133 fair value estimate and narrow moat rating for Apple and we still consider Apple to be one of the better investment ideas within the tech sector.

Improvements to the iPhone with the iPhone 7 and 7 Plus include water resistance, 20% more battery life, double the storage, twice the speaker volume, improved camera technology, a 40% faster processor and 50% faster LTE connectivity (all versus the one-year old iPhone 6s). The 7 Plus has a dual lens camera which, when combined with enhanced software and processing power, may start to encroach on professional-grade photo quality. Admittedly, none of these features, in isolation, will likely drive a wave of phone upgrades, particularly versus the 6s. However, these enhancements start to add up when compared with the two-year old iPhone 6 (Apple’s biggest smash hit device) and older iPhones (twice the processor speed, three times faster LTE speed versus the iPhone 6, for example). Further, we saw little that leads us to believe iOS users will have good reason to flee the ecosystem, so we continue to expect Apple to profit from future iPhone upgrades over time.

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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.