For Apple, It's All About The 'X' Factor Now

Heading into Apple Inc. AAPL's earnings report on Thursday, many investors had concerns surrounding the fiscal first quarter guidance, as it would include initial iPhone X projections. But once released, the guidance was "better than feared," Morgan Stanley's Katy Huberty said in a Friday note.

Apple's fiscal first quarter guidance was highlighted by an acceleration in growth in China and strength in India along with broad strength across all categories, Huberty said. (See Huberty's track record here.) These factors helped offset a slower iPhone X production ramp, but overall the guidance was in line with what the Street expected.

Huberty maintains an Overweight rating on Apple's stock with a price target raised from $199 to $200, based on a 15.4x multiple on fiscal 2018E EPS of $13.

Looking forward to calendar year 2018, Apple could ship a total of 268 million iPhone units, above the Street's consensus estimate of 242 million units, accordnig to Morgan Stanley.

China will prove to be the largest contributor to Apple's 2018 growth, as shipments are expected to surge 80 percent from 41 million in the past year (through June) to 74 million, as the large base of iPhone 6 users are expected to upgrade for the first time since 2014, Huberty said.

Apple faces a gross margin headwind of 110 basis points due to higher memory prices in the fiscal first quarter and due to higher iPhone costs from the ongoing production ramp, Huberty said. Encouragingly, Apple's flattish gross margin guide signals that the Services business continues to not only perform well, but show accelerated growth, the analyst said. 

The iPhone X will unlock "pent-up iPhone upgrades," particularly in China, which will help drive total iPhone unit growth, revenue and earnings per share above consensus estimates in fiscal 2018, Huberty said. 

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Photo courtesy of Apple.