Morgan Stanley Turns Incrementally Bullish On Apple Ahead Of Q3 Report

Tech giant Apple Inc. AAPL is scheduled to report its fiscal third-quarter earnings July 31, and Morgan Stanley is projecting the print will fall in-line with expectations. 

The Analyst

Morgan Stanley's Katy Huberty maintained an Overweight rating on Apple with a price target lifted from $214 to $232.

The Thesis

Huberty is modeling for Apple to report the following Q3 metrics: 

• Revenue: $51.941 billion.
• EPS: $2.17.
• Gross margin: 38.3 percent.
• 39.8 million iPhone units at an average selling price of $702 for total revenue of $28.166 billion.
• 10.5 million iPad units at an ASP of $454.
• 4.301 million Macs at an ASP of $1,321.
• Wearables revenue of $3.728 billion.
• Services revenue of $9.627 billion.

Related Link: Apple Gets A Price Target Raise, But Analyst Sees Challenges Ahead

Services A 'Focal Point'

Apple's iPhone results "matter less" late in a cycle, and investors will focus more on Services results, Huberty said. (See the analyst's track record here.) 

The Q3 print is likely to show that Apple's Services growth story expanded in June, she said. The analyst forecast the following:

• App Store growth consistent with the prior quarter at 27 percent.
• Apple Music paid subscriber growth of 70 percent.
• Limited insight into other Services lines.

Q4 Outlook

Throughout Apple's June-ending quarter, an analysis of 50-60 members of Apple's supply chain suggests strong performance in April and May but a weaker June — especially among a subset of 12 suppliers who have a stronger correlation to Apple's sales guidance and stock performance, Huberty said. 

When this subset of suppliers see a deceleration in their sales growth, Apple's one-quarter forward guidance typically falls short of expectations, the analyst said. The companies' sales growth decelerated 600 basis points this quarter versus the March quarter, which implies "modest downside risk" to Apple's September-ending guidance, she said. 

Sum-Of-The-Parts Valuation

Morgan Stanley values Apple just north of $1 trillion ($232 per share) with a sum-of-the-parts model:

• The Hardware/Devices business is valued at $611 billion ($223.6 billion in revenue, 2.7 times multiple).
• The Services business is valued at $355 billion ($48.5 billion in revenue, 7.3 times multiple).
• $217.168 billion in cash and $121.84 billion in debt.

Price Action

Apple shares were trading 0.78 percent higher at $193.10 at the time of publication Tuesday morning. 

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Photo courtesy of Apple.