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Apple's Bear-Case Is Off The Table, According To Morgan Stanley

Apple Inc. AAPL reported better-than-expected June quarter margins. Channel inventory reductions have set the backdrop for improved 2H results, Morgan Stanley’s Katy L. Huberty said in a report. She maintained an Overweight rating on the company, while raising the price target from $120 to $123.

Apple reported its quarterly gross margin at the high-end of its guidance range of 37.5-38.0 percent, despite higher-than-expected channel inventory reductions. The company also announced higher-than-expected guidance for the September quarter. Analyst Katy Huberty commented that the results and guidance have pushed the margin debate “to the back burner.”

The EPS estimate for FY17 has been raised from $8.55 to $8.80.

Another Super-Cycle In The Offing

“We expect investors to begin positioning for another iPhone supercycle starting in the next several months,” Huberty wrote. Management’s tone on iPhone demand was more positive and the bear case is now “off the table.” Meaningful improvements in battery life and display innovation would likely result in a higher upgrade rate when the new iPhone is launched in September 2017.

“With a growing iPhone installed base and the highest switching rate ever, Apple could see an even bigger supercycle in just over a year compared to iPhone 6 in 2014. What's more, Apple appears more focused on Artificial Intelligence and Augmented Reality applications that can further support improving upgrade rates and possibly switching rates, and sustain Services growth,” the analyst mentioned.

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Jul 2016BTIG ResearchMaintainsBuy
Jul 2016UBSMaintainsBuy
Jul 2016Brean CapitalMaintainsBuy

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