Melius Research Affirms Buy on Apple, $370 Price Target

Melius analyst Ben Reitzes reiterated a Buy rating and $370 price target on Apple (NASDAQ: AAPL).

“The margin guide down q/q (excl. tariff refunds) of 140bps q/q due to memory was frankly about as good as it could be given the cost inflation, and even better than some feared.

To us, the biggest issue will be that Apple guided for the 3rd quarter in a row of Services deceleration, which got hit by FX but is also seeing “out-of-app” purchases in gaming and other Apps.

The path toward Services re-acceleration likely lies in iCloud+ seeing tiers tied to SiriAI usage and possible transaction-related revenue streams from use of the AI assistant.

We think Services is what matters since this 76% gross margin business is needed to offset the impact of higher memory prices, possibly forever.

On the positive side, the revenue outlook for December (~$2B above consensus) looks reasonably conservative to us given higher prices and positive mix in iPhones and Macs.

In addition to hearing that silicon shortages have abated, another big positive is the ongoing sales trends in Greater China, which grew 21% y/y in F4Q, marking the 4th quarter in a row with growth above 20% there.

With Duo production on the rise, China could keep going.

However, the margin outlook means street EPS estimates likely don’t go higher.

We were pleased to hear that silicon shortages have abated for Apple as it has moved to 2nm production lines, which means it may have the ammo to beat its December revenue guidance with ongoing success in China.

New CEO John Ternus played it safe on his first call, sticking to the familiar script on guidance with few details on new products.

The worry from the quarter will be Services, which many believe is under threat from agents and out-of-app purchase options.

We have faith that Apple can use iCloud+ to offset these hits, but we’d like to see greater urgency since it’s the main margin lever and pillar of the multiple.

Our EPS estimates don’t really change much and we do think that investors will hide here as long as there is so much hair on the AI infrastructure trade.”

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