Apple: Likely to Lift Fair Value

 Apple (AAPL) reported strong September quarterly results. More importantly, it provided a forecast for the December quarter that was relatively in line with our expectations and matched the hype that the firm is in the midst of a tremendous iPhone launch. We will likely raise our fair value estimate for Apple, but by no more than 10%, and view shares as fully valued today. We’ll maintain our narrow economic moat rating.

Apple sold 39 million iPhone units in the September quarter, up 16% from the year-ago quarter, while average selling prices also rose 4% thanks to strong sales of newer iPhones during the last 11 days of the quarter. Mac was the pleasant surprise, with revenue up 18% annually, far outpacing the overall PC industry. IPad sales continue to lag, however, with revenue down 14% from the year-ago quarter. Apple also bought back another $17 billion of stock.

Apple expects revenue in the all-important December quarter to be in the range of $63.5 billion to $66.5 billion, which, at the midpoint, would represent 13% annual growth. We estimate that the forecast implies that iPhone unit sales will be in the low 60-million-unit range, ahead of our prior expectations. However, Apple expects currency headwinds and higher production costs to keep gross margin pegged in the 38% range.

Meanwhile, Apple will also plow some of its excess cash back into the business, as operating expenses should rise 24% annually. In turn, Apple’s implied EPS guidance met, rather than exceeded, Street expectations. We remain confident in Apple’s narrow economic moat and positive moat trend ratings, as switching costs continue to increase with every new product and service Apple successfully delivers. Yet, in our view, the December forecast might be a microcosm of Apple’s long-term financials—premium products sold to a loyal customer base, partially offset by higher costs to deliver these popular devices.

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