Apple Sales Down, but Better than Expected

Morningstar analysts would still encourage investors to look forward to the iPhone 7 launch in September, rather than put too much emphasis on these near-term results

Brian Colello, CPA 27 July, 2016 | 1:01PM
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The latest Apple (AAPL) results were not as bad as initially feared by investors, with the stock up 7% in after-hours trading. But they were not particularly bright either – with revenue in the three months to the end of June at $42.4 billion, down 15% year over year.

Apple is one of our best long-term investment ideas within the tech sector

Morningstar analysts would still encourage investors to look forward to the iPhone 7 launch in September, rather than put too much emphasis on these near-term results which relate to aging products. Nonetheless, we remain confident in our narrow economic moat rating and our long-term thesis that most of Apple’s iPhone customers today will continue to buy future iPhones. We will maintain our $133 fair value estimate for Apple shares and continue to view the stock as one of our best long-term investment ideas within the tech sector.

iPhone sales of 40.4 million units were also down 15% year over year. Although iPhone average selling prices, fell 10% year over year, Apple was encouraged by sales of its lower priced iPhone SE, as it believes it captured more switchers from Android than ever before, surmising that such customers could not afford prior iPhone versions.

iPad revenue was a bright spot, up 7% year-over-year, while average selling prices rose 18% thanks to a richer mix toward the higher-priced, and recently released, iPad Pro.

What Next for Apple?

Longer term, we still tend to believe that Apple’s sluggish iPhone sales in recent quarters are a function of lengthening replacement cycles, rather than premium smartphone market share loss to Android-based competitors, which would be far more concerning to us.

Apple reiterated that the upgrade rate for the iPhone 6s resembled the 5s two years ago, but that the iPhone 6 upgrade cycle was an anomaly, likely boosted by both the introduction of a large screen device and Apple’s carrier partnership with China Mobile. We still think Apple has some degree of control over upgrade cycles—a truly innovative device may lead to faster upgrades, or vice versa.

Thus, we’re looking ahead to the iPhone 7 launch for signs whether Apple’s iPhone upgrade cycle will speed up or face another year of deceleration. That said, even if replacement cycles stay at recent levels, we still think Apple’s iPhone business is more resilient than what the market is giving the company credit for.

At some point, whether it is the iPhone 7 this year or the Fall 2017 iPhone, potentially named the iPhone 7s, we anticipate that customers will replace their aging iPhones with newer iPhones, rather than depart the platform for competitors.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Apple Inc229.87 USD0.59Rating

About Author

Brian Colello, CPA  is a senior stock analyst with Morningstar.

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