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Innovation Mojo Boosts Apple’s Fair Value

We’re raising our fair value estimate for Apple after incorporating the impact of Apple Watch, but expectations for the firm remain too high.

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In our view,  Apple’s (AAPL) latest product introduction event was a success. Barring any execution missteps, the launch of two larger-screen iPhones, Apple Pay, and Apple Watch should put to rest any fears that Apple and its management team had misplaced their innovation mojo. News around the iPhone 6 and iPhone 6 Plus was mostly in line with our expectations. At this point, we remain comfortable with our estimates of 60 million iPhone unit sales in the December quarter, even though we realize that Apple’s current stock price likely bakes in even loftier expectations. We'll likely raise our fair value estimate to $93 per share as we incorporate financial estimates of Apple Watch into our valuation. Apple's narrow economic moat rating is unchanged.

Apple’s iPhone 6 and iPhone 6 Plus may emerge as two of the best smartphones on the market, as Apple continues to focus on the industry's premium segment. However, headwinds to future growth likely stem from low-end and mid-range competition from Android. Apple Pay looks interesting, and we’re pleased that Apple took great lengths to discuss security associated with this new service. We're much more interested in Apple Pay in terms of adding another valuable service that both enhances the user experience, and adds switching costs that promote customer stickiness. Apple could potentially earn incremental revenue from Apple Pay in the long run, but we don’t see it moving the firm’s revenue needle today.

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Brian Colello does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.