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Stock Analyst Update

Why We're Increasing Our Fair Value on Apple

The smartphone titan is doubling down on its premium price strategy after raising the bar on price last year with the iPhone X.

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On Sept. 12,  Apple (AAPL) held its annual iPhone launch event, following its historical pattern of releasing an "s" version of its prior-year model (iPhone X). As widely rumored in the weeks leading up to the event, the firm announced two OLED models and one LCD model (the iPhone Xs, Xs Max, and XR, respectively). We note the firm doubled down on its premium price strategy after raising the bar on price last year with the iPhone X. Specifically, its iPhone Xs takes the $999 price point while the Xs Max occupies the $1,099 slot normally reserved for the "Plus" or larger variant. Meanwhile, the iPhone XR, the LCD version of the iPhone Xs, comes in at $749. This price for the lower-end device marks another price increase of $50 from the iPhone 8 last year.

Given that customers have shown a willingness to pay a premium for Apple’s flagship devices despite intense competition across the high-end smartphone market, Apple’s pricing of its latest iPhone lineup implies management expects strong customer stickiness to persist. This corroborates with our narrow-moat rating based on switching costs and intangible assets. After incorporating Apple's latest pricing and roll-out schedule into our valuation we are raising our fair value estimate to $200 from $175 per share, as we hold our iPhone unit sales estimates relatively constant but assume higher future average selling prices, or ASPs, into our model. However, we still view shares of this smartphone titan as overvalued, as we think the market may be too bullish on near-term and long-term iPhone revenue; ASPs for the iPhone may remain elevated into the future but we don’t foresee strong volume growth given the marginal nature of the improvements in this year’s iPhones and, likely, future models.

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