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Stock Analyst Update

iPhone Demand Remains Healthy, Resilient

Near-term margins at Apple will be squeezed by iPhone 7 Plus supply constraints, but our long-term forecast remains intact.

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 Apple's (AAPL) solid fiscal fourth quarter results and the firm's forecast for the all-important December quarter were relatively in line with our expectations and continue to point toward healthy, resilient demand for the iPhone. The biggest near-term issue revolves around supply constraints for the higher-priced iPhone 7 Plus, which will weigh on gross margins and likely contributed to Apple's stock falling 3% after hours.

While Apple's revenue forecast doesn't indicate tremendous iPhone unit or revenue growth with the iPhone 7 launch next quarter, or likely for all of fiscal 2017, our long-term valuation for Apple hinges on a steady iPhone business with repeat device sales made to loyal customers, thanks to switching costs around the iOS ecosystem. In this context, the company's results give us confidence that our thesis remains intact. We will maintain our narrow moat rating and do not expect a material change to our $133 fair value estimate for Apple.

Apple's revenue in the September quarter was $46.9 billion, down 9% year over year and above the midpoint of the firm’s forecast of $45.5 billion-$47.5 billion as discussed in July. Apple sold 45.5 million iPhones in the September quarter, down 5% year over year but slightly ahead of our prior expectations, while Mac and Other Products revenue (mostly Apple Watch) were slightly worse, down 17% and 22% year over year, respectively.

For the December quarter, Apple expects revenue in the range of $76 billion-$78 billion, which would represent 0%-3% year-over-year growth. We think the forecast implies modest iPhone unit growth, offset by lower iPhone average selling prices as the company might not be able to fully meet demand for the higher-priced (and likely higher-margin) iPhone 7 Plus by the end of December. Management expects this issue to drag gross margins to 38%-38.5%, below our prior expectations and contrary to the normal seasonal uptick Apple tends to see in December.

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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.