Apple’s long-term positives outweigh rare earnings miss, Morgan Stanley says

Shorter-term macro issues don’t detract from the long-term value at Apple, Morgan Stanley analysts wrote in a Friday morning note that reiterated an overweight rating and a $175 price target.

“Taking a step back, it’s rare to see Apple miss and guide down in a quarter, but we believe the long-term positives from tonight’s report outweigh the short-term negatives,” Morgan Stanley’s Erik Woodring wrote. Apple’s Thursday night earnings report cited a strong dollar, continued production issues in China, and the broader macroeconomic environment as three reasons for Apple’s first year-over-year sales decline since 2019.

“On the third factor, I would say was just the challenging macroeconomic environment, and you’re hearing that from, I would think, everybody,” CEO Tim Cook told CNBC’s Steve Kovach.

But Morgan Stanley assesses those headwinds as transitory, noting both accelerated growth in iPhone installed base and a continued upward margin trajectory as longer-term upside which will ensure “the Apple flywheel keeps spinning.”

Morgan Stanley reiterated its Top Pick rating for Apple. The company has managed to navigate a broader tech downturn with considerable success and is one of the few tech companies that has staved off layoffs and maintained a level of operational expense (opex) discipline.

It’s that same discipline that helps Morgan Stanley analysts maintain a bullish outlook on Apple, which guided to a Mar. 2023 gross margin ranging from 43.5 to 44.5%, according to the note.

“We believe Apple’s ability to post the highest gross margin in a decade despite seeing revenue decline Y/Y is impressive, and moving forward, we expect gross margins to improve as mix, FX, commodities, and logistics all work in Apple’s favor through the rest of 2023 and into FY24,” Morgan Stanley’s note said.

Apple’s user spend levels are also keeping Morgan Stanley bullish, proof that “the underlying drivers of Apple’s model remain robust.”

Investors have apparently embraced Morgan Stanley’s appraisal of Apple’s durability as a long-term investment. Apple shares were up around 1% at the open Friday, despite the sales miss, recouping losses from a 4% drop Thursday night. The company also reported misses on the top and bottom lines, beating analyst expectations only in iPad and services revenue.

CNBC’s Michael Bloom contributed to this report.