Skip to Content
Stock Analyst Update

Strong 3rd Quarter for Apple Ahead of iPhone X Launch

We're boosting our fair value estimate based on improved iPhone pricing and gross margin assumptions.

Mentioned:

 Apple (AAPL) reported strong fiscal third-quarter earnings with notable strength in iPad unit sales and services revenue, while premium iPhone sales (iPhone 7 and 7 Plus) held up well during the usual summer lull before new iPhone launches in the fall. The company also provided a fiscal fourth-quarter outlook that may have alleviated some investor concerns about production delays for Apple's upcoming ultra-premium iPhone (which we'll name "iPhone X"). All in all, we will raise our fair value estimate by about 5% to $145 from $138, driven by improved iPhone pricing and gross margin assumptions, and maintain our narrow moat rating for Apple. Shares rose 6% after hours on the heels of such strong news and ongoing buzz around the iPhone X, which might carry a sticker price of $999 or higher. Looking at Apple longer term, we are only cautiously optimistic about the iPhone X at this point. We think Apple has a good chance to capture even higher prices in the near-term, but question the extent of cannibalization on its traditional high-end tier of iPhones (iPhone 7s), replacement cycles lengthening thereafter (as iPhone X customers may no longer upgrade on an annual basis), and whether an iPhone X introduction means that Apple can create an ongoing tier of $999-plus devices, or if this ultra-premium launch is a one-time item (at worst) or will occur irregularly.

Apple's revenue in the June quarter was $45.4 billion, up 7% year over year and toward the high end of the firm's forecast range of $43.5 billion-$45.5 billion. Apple sold 41 million iPhones in the quarter, up 2% year over year while many emerging markets saw 25%-plus growth. The firm noted sales of the high-end iPhone 7 and 7 Plus were more than 10% higher than 6s and 6s Plus sales a year ago.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.