Investment analysts at Morgan Stanley raised Apple's target price based on the prospects of the services industry, iPhone 15's gross profit margin and consumers' strong interest in Vision Pro. Morgan Stanley's last price target adjustment was in October, when analysts cited iPhone 15 Pro supply issues and lowered the target price by $5 from $215 to $210.
In a new note to investors, the investment bank said its latest "supply chain checks show iPhone production is relatively stable."
"As near-term risks are calmed and attention turns to factors that could drive a fundamental recovery - services, GM and edge AI - we are more positive on AAPL shares. Against this backdrop, we will discuss investors' top concerns through year-end. Price target rises to $220 as we make M2M adjustments to valuation; reiterate OW [overweight]," the analysts wrote.
Morgan Stanley believes that "strong performance in services and gross margins offset the well-known near-term challenges facing the iPhone in the Chinese market. Another reason why Morgan Stanley is "increasingly bullish" on Apple is its $3 trillion market capitalization and the fact that Apple has outperformed the S&P 500 by 30 points so far this year."
Overall, the analysts said, "With near-term risks reduced, our view on Apple shares has become more positive as we refocus our attention on factors that may drive a fundamental recovery over the next 12-18 months."
The key fundamental factors are Apple's services, gross margins and expectations for the company's artificial intelligence or "edge AI" positioning.
"We believe Apple is well-positioned to lead the market in edge AI and thus become a beneficiary of AI," the analysts wrote. "Apple's primary monetization mechanisms are: 1) hardware share revenue/refresh cycle contraction; 2) new approaches to traffic acquisition cost (TAC); [and] 3) better service monetization; 4) App Store purchases and/or 5) premium Siri subscription services."
"In short, we believe the need for more powerful hardware to run AI workloads at the edge will likely drive the iPhone upgrade cycle," the note continued. "Every 0.2 year contraction in the replacement cycle creates 5-8% upside to our iPhone unit/revenue forecast."
Morgan Stanley said it also found "very strong early purchase intent" for Apple's Vision Pro.
Morgan Stanley predicts that "by the third year, Apple's AR/VR headset [will] achieve revenue of US$8 billion." Morgan Stanley said that "the product's revenue ranking will be only lower than AirPods, but higher than Apple Watch."
Analysts do see several potential issues with Apple that investors are concerned about. However, Morgan Stanley believes that in each case, Apple will not be greatly affected.
The analysts said: "Given Apple's revised wording of AppStore risk factors in its FY23 10K report, we believe changes to comply with the EU DMA are imminent (although not yet finalized) and will likely come in the form of allowing third-party app stores to be used on EU iOS devices. However, the EU only accounts for ~7% of AppStore spend, and our survey work shows that Apple remains able to compete, with consumers overwhelmingly preferring the AppStore's unparalleled privacy, ease of use and seamless OS integration."
There is also the issue of the Department of Justice suing Google. Apple is not affected, but the Google-Apple deal has received the most stringent scrutiny and may also be the most threatened deal.
Morgan Stanley said: "We continue to believe that regulation/legislation [after the DOJ sues Google] is the main risk for Apple, and if there is an adverse ruling in this case, we believe Apple will have 5-8% downside to FY26 EPS. However, the DOJ trial schedule against Google was recently pushed back, An initial ruling is unlikely before the end of 2024 (versus earlier expectations as early as this month), followed by a lengthy appeals process that could be followed by more trials - which could push the conclusion date to 2026 or later - meaning a key near-term risk to Apple's stock price could be that it is significantly undervalued by the market."
One area where Morgan Stanley seems not optimistic about Apple's future is the iPhone. Declining demand in the Chinese market is a problem, and related to this is that Apple may cut orders for the iPhone 15 series.
The analyst acknowledged this, noting that "iPhone retention rates are at their lowest since 2013" but that its supply chain checks "suggest the risk of near-term iPhone production cuts is limited."
Apple regained a market value of US$3 trillion in December 2023, and the company reached this goal in January 2022 and June 2023. Each time, the company's market capitalization quickly fell back below $3 trillion, each time attributed to investor uncertainty.