Apple Flexes Its Premium Status; Shares Fairly Valued

Loyal iPhone users and many new customers in emerging regions have flocked to the iPhone X, 8, and 8 Plus. Nevertheless, we foresee the upcoming iPhone launch in September likely being more marginal in nature, leading to lower iPhone sales in calendar 2019. We are maintaining our $175 fair value estimate for Apple and would recommend prospective investors seek a wider margin of safety before committing capital to this narrow-moat entity.

The firm generated $53.27 billion in sales for the quarter, up 17% year over year. ASPs for the iPhone grew 20% to $724 from $606 a year ago, led by the iPhone X, 8, and 8 Plus cohort. With iPhone units effectively flat, iPhone sales also grew 20% to $29.9 billion.

Geographically, however, Apple enjoyed double-digit unit growth in the U.S., Canada, Germany, and Hong Kong, among other markets. Furthermore, we were pleased to see lower iPhone channel inventory (by 3.5 million units) during the quarter. CFO Luca Maestri noted the firm exited the quarter at the lower end of Apple's target range of 5 to 7 weeks of iPhone channel inventory, which bodes well for the firm's suppliers.

Consistent with our narrow moat rating stemming from switching costs, CEO Tim Cook cited data from 451 Research that indicated the iPhone X had a customer satisfaction score of 98%. Wearables (Apple Watch, AirPods, and Beats) saw accelerated growth of 60% driven by iPhone users looking to augment their iOS experience.

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