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Stock Analyst Update

Apple Delivers Plus-Size Results

We're raising our fair value estimate after the firm set quarterly records for iPhone unit sales.


 Apple (AAPL) reported strong fiscal first-quarter results while the firm's relatively muted second-quarter forecast was not too alarming, in our opinion.

We're encouraged that Apple set quarterly records in both iPhone unit sales and iPhone average selling prices, or ASPs, during the all-important holiday season, boosted by a mix shift toward the higher-priced iPhone 7 Plus.

Meanwhile, Services revenue growth remains impressive while the firm's target of doubling this business within the next four years is ahead of our updated expectations and could provide further upside.

We view the firm's quarterly results as squarely in line with our long-term thesis that Apple can retain customers because it has created modest switching costs around the iOS ecosystem. We will raise our fair value estimate for Apple to $138 per share from $133 thanks to stronger near-term results and slightly more optimistic gross margin and operating expense assumptions. Our narrow moat rating for the company remains intact, and we still view Apple's shares as modestly undervalued today.

Apple sold 78.3 million iPhones in the December quarter, up 5% year over year (and up 8% on a sell-through basis to end customers) as the company saw no ill effects from its decision to remove the analog headphone jack from its latest devices. Sales in mature markets like the U.S., Japan and Western Europe were all up double digits, which we think bodes well for the resilience of Apple's customer base as we view customers in these markets as relatively stickier.

Meanwhile, a positive mix shift toward the iPhone 7 Plus drove ASPs to $695 per iPhone, up 1% year over year and 12% sequentially despite ongoing currency headwinds from a strong U.S. dollar. Mac revenue was also a bright spot on the heels of Apple's recent Macbook Pro release, with revenue up 7% year over year.

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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.