Buy Apple stock for long-term benefit, says Morgan Stanley

Let’s start with the bad news. Given supply shortages during the busy holiday season amid weak global demand, FY23 iPhone unit sales are expected to decline 9% year over year to 218 million units. For the record, this amounts to the largest year-over-year unit decline for the iPhone since FY19.

In addition, with the addition of other short-term issues such as the difficult macroeconomic environment, currency headwinds, lower consumer electronics spending, Apple (NASDAQ:AAPL) could realistically deliver the first fiscal year of revenue and EPS declines since 2019.

The good news, according to Morgan Stanley analyst Erik Woodring, is that “looking beyond the near term, we see a catalyst-rich path of events over the next 12 months… new product launches and the potential introduction of an iPhone subscription program.”

As a result of the iPhone production outages, Woodring expects iPhone replacement cycles to extend to 4.4 years by the end of FY23 – setting a new record and nearly 0.7 years longer than the investment firm’s previous expectation. Essentially, Woodring estimates that this year’s replacement cycle extension has led to a “delay in demand” of 10 to 30 million iPhones.

In addition to the fall in iPhone units in FY23, Woodring also believes investors have been concerned about the slowdown in Services growth from double-digit growth in FY21 to mid-single-digit year-over-year growth over the past 6-9 months. However, Woodring points out that behind the decline is “the most extreme FX headwind” Apple has encountered since the company began tracking the data, suggesting Services growth remains low at double-digits in constant currency. Looking ahead, Woodring also expects a “renewed acceleration” in Services growth through the end of FY23 and into FY24.

In addition, when factoring in currency headwinds, Woodring thinks what’s “most undervalued” by investors right now is how robust Apple’s “underlying” gross margins are. According to Woodring’s analysis, a deep dive in gross margin ~150 bps implies “average benefit” versus Street forecasts in FY23 and FY24.

The bottom line is that these “undervalued catalysts” cement Apple’s “Top Pick” status and lead Woodring to raise its price target from $175 to $180, implying the stock will rise about 19% over the next year. Woodring’s rating remains Overweight (i.e. Buy). (Click here to view Woodring’s track record)

So that’s Morgan Stanley’s vision, but what does the rest of the street have in mind for the tech giant? AAPL has a Strong Buy rating by analyst consensus, based on 25 Buys and 6 Holds given over the past few weeks. The stock is selling for $151.19 and its $171.53 average price target implies ~13% growth over the next year. (To see Apple stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is for informational purposes only. It is very important to do your own analysis before making an investment.

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