Morgan Stanley anticipates Apple Inc. (AAPL.US) Q1 financial report: short-term pressure, waiting for intensive catalysis in the second half of the fiscal year.

Morgan Stanley recently released a preview report on Apple Inc.'s first-quarter earnings report, stating that in the short term, Apple Inc.'s fundamentals may be under pressure, so they are cautious. However, with many catalysts in the second half of the fiscal year, they are still maintaining a "buy" rating with a target price of $315. The demand for iPhone 17 continues to be strong, indicating that Apple Inc.'s revenue may exceed expectations/raised guidance. However, cost pressures from memory and market misjudgments on operating expenses (opex) models may limit the positive revision space for earnings per share (EPS), making it difficult for the stock to receive buying support during the earnings release period, despite its attractive valuation and many catalysts in the second half of the year. Morgan Stanley expects Apple Inc.'s stock price to trade sideways or slightly decline after the earnings report release on Thursday. The market has not fully recognized the strong performance of iPhone 17 (the bank's forecast for iPhone revenue in the December/March quarter is 4%-8% higher than market consensus), and there are several factors to consider. On one hand, the market's forecast for operating expenses in the March quarter is 7% lower than Morgan Stanley's, and their forecast for gross margin in the March quarter is 30 basis points lower than the markets, which could limit the positive revision of EPS even if revenue exceeds expectations. In addition, given the continuous escalation of memory costs and the market has not fully priced in this factor, the bank believes there is downside risk to the market's forecast for EPS in the June quarter (Morgan Stanley forecasts $1.62 vs market consensus $1.71). In conclusion, despite being cautious tactically before the earnings release, Morgan Stanley still believes that Apple Inc. will outperform the market in 2026, with multiple catalysts in the second half of the fiscal year: Siri reboot, launch of foldable screen iPhone, and release of the first 2-nanometer process iPhone 18 series, all of which will drive performance in the second half of the year. The bank maintains a "buy" rating on Apple Inc. stock with a target price of $315 unchanged. Apple Inc. is currently experiencing one of the strongest iPhone product cycles in history, and capacity data and supplier surveys support the bank's above-market consensus iPhone expectations. Overall, the bank's supply chain research shows that iPhone 17 shipments in December and March quarters will be higher than current market consensus. The following points support the bank's views: (1) Recent surveys of component suppliers show that iPhone production capacity in the December quarter is extremely strong - in some cases close to 90 million units, while the bank's forecast is for 83 million units. The bank has not fully incorporated this capacity increase into its forecast, as they believe Apple Inc. is purchasing excess components in advance for potential supply constraints in the future, but this still means the bank's forecast for iPhone shipments in the December quarter may be conservative; (2) In October-November 2025, Apple Inc. added 3-nanometer wafer orders to Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, which is equivalent to about 6 million additional iPhone units in capacity, providing upward revision room for market forecasts for iPhone shipments in the March and June quarters. The banks team in Greater China has already factored in higher seasonal capacity predictions for the March quarter (56 million units, a 12% increase year-on-year or a 26% decrease quarter-on-quarter, while historically the seasonal quarter-on-quarter decline was 32%), which means iPhone shipments will reach 60 million units in the March quarter, higher than the market consensus of 54 million units; (3) Although this year's Chinese New Year is later (delayed by 2.5 weeks), resulting in a higher year-on-year base, iPhone sales in the Chinese market from January to present have still achieved strong growth of 5%-10% year-on-year, with December shipments increasing by over 20% year-on-year. All of this data convinces the bank that market forecasts for iPhone shipments are still too low. The bank's forecast for iPhone revenue in the December quarter is $80 billion (83 million units shipped), 4% higher than market consensus; and for iPhone revenue in the March quarter, it is $55.4 billion (60 million units shipped), 8% higher than market consensus. For the full fiscal year 2026, the bank's forecast for iPhone shipments is 260 million units, 14 million units higher than market consensus (i.e. 6%), reflecting the strong performance of the iPhone 17 product cycle and adjustments in the pace of the iPhone 18 release in the second half of 2026. The report emphasizes that in the earnings conference call, investors should focus on five key points: guidance on the impact of memory costs on future quarters, the sustainability of AI-related operating expenses, disclosure of new device installation bases, commercialization plans for Gemini partnership, and resilience of demand in the Chinese market. In conclusion, despite short-term cost uncertainties, the bank believes that the many catalysts and margin of safety in valuation in the second half of the year will support Apple Inc.'s long-term outperformance. It is still a window of opportunity for long-term investors to position themselves in the stock.