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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.


 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.

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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.