Apple Hasn't Lost Its Edge In China

The debate over Apple Inc.'s AAPL prospects in China will be hotly contested by investors and analysts throughout 2017.

OTR Global presented the bearish case in a report last week. In a research report on Tuesday, analysts at Morgan Stanley took a deep-dive into Apple's outlook in China.

The report, led by Morgan Stanley's Katy Huberty, noted investors shouldn't be concerned about Apple's 24 percent decline in revenue coming from the Chinese market and the company hasn't lost its edge in the lucrative market.

Huberty noted Apple's fiscal first quarter earnings report showed revenue from Main-land China returned to a 6 percent growth (in constant currency), which marks a reversal from the 7 percent decline seen in the fiscal second quarter.

Related Link: 6 Reasons Apple Is Bullish On China

Meanwhile, Apple is seeing growth in Mac and iPad revenue in China as well as a boost in its Services segment. This indicates Apple's users in China are as loyal to the Apple ecosystem and likely indicates many users are waiting for a new iPhone to upgrade.

New iPhone

Huberty believes Apple will release a new revolutionary iPhone with flexible AMOLED displays, a new casing made of glass, wireless charging technology, 3D sensors and more advanced artificial intelligence capabilities.

The analyst argued the new iPhone will drive an acceleration of new upgrades across China. Specifically, Huberty estimates under a base case scenario China will contribute 27 million incremental iPhones during the upcoming "Supercycle," which is notably above the 19 million total unit growth in fiscal 2018 Wall Street analysts as a whole are expecting.

Shares of Apple remain Overweight rated with a price target raised to $154 from a previous $150.