4 Reasons Morgan Stanley Loves Apple

Morgan Stanley was one of several analysts to issue updates on Apple, Inc. AAPL Thursday, touting signs of stabilization in the China iPhone market.

The Analyst

Morgan Stanley analyst Katy Huberty reiterated her Overweight rating and $197 price target for Apple.

The Thesis

After Apple cited China and the ongoing trade war as the cause for its guidance cut in January, Huberty said iPhone pricing cuts in China has led to Apple gaining back lost market share so far in 2019.

“Combined with stabilizing iPhone supply chain data points, we now see an upward bias to our iPhone estimates in the March quarter,” Huberty wrote in a note.

Huberty highlighted four specific reasons for optimism about Apple’s first quarter:

1. Even in a weak Chinese smartphone market, Apple gained share from domestic competitors in both January and February.
2. After six consecutive months of negative iPhone build revisions, Morgan Stanley didn't revise its iPhone build estimate lower in February.
3. Apple’s March quarter guidance didn’t assume improvements in iPhone sales from December to January carried through to February and March, but installed base trends suggest otherwise.
4. Replacement cycle data indicates iPhone replacement cycle duration have converged with that of PCs faster than expected and could stabilize in coming quarters.

On top of all the positive data, Huberty said investor sentiment toward Apple is neutral to negative at the moment, and the company may have a relatively low bar to clear in the March quarter.

Roughly 20 percent annual growth in high-margin Services segment growth coupled with stabilization of hardware sales will eventually lead to earnings multiple expansion for Apple stock, Huberty said.

Price Action

Apple shares traded higher Thursday by 1.1 percent to $183.85.

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Photo courtesy of Apple.