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Stock Analyst Update

Apple Fairly Valued After Year-Long Runup

The iPhone maker’s competitive position looks strong, but the 57% increase in stock price over the last year has left shares fully valued.


 Apple (AAPL) reported solid fiscal second-quarter results and provided investors with a third-quarter forecast that was relatively in line with our expectations and points to decent ongoing demand for Apple's products, even though the firm is already seeing customers pause on iPhone spending in anticipation of the company's tenth anniversary iPhone due later this year.

Meanwhile, services revenue grew nicely, which we think still bodes well for customer stickiness around the iOS ecosystem, which is the backbone of our narrow moat rating for the firm. Further, Apple issued a healthy raise to its capital return program, boosting its quarterly dividend by 10.5% and adding $35 billion to its share repurchase authorization. We will maintain our $138 fair value estimate for Apple and shares appear fairly valued today after a previous 57% run up in the stock over the past 12 months for our former Best Idea.

Apple sold 50.8 million iPhones in the March quarter, down 1% year over year on a sell-in basis to retailers but up 1% on a sell-through basis to end customers, while iPhone revenue rose 1% year over year. Apple saw nice double-digit growth in many end markets, including the U.S. However, greater China remains a bit of a near-term iPhone weak spot, although we wouldn't rule out pent up demand in this region for the next iPhone model either and we still like Apple's long-term prospects in the region. Services revenue grew 18% year over year, with 40% revenue growth from the Apps Store and double-digit revenue growth from Apple Music subscriptions and iCloud storage. With each additional service, we think Apple is strengthening the switching costs around its iOS operating system, which will make customers less likely to switch to Android-based phones over time. Other Product revenue, including Watch, Airpods and Beats headphones, did relatively well and exceeded our expectations.

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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.