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Morgan Stanley hikes AAPL to $247, says investors are unnecessarily negative

Apple is an attractive company to invest in ahead of its upcoming earnings report, Morgan Stanley suggests, with low Wall Street estimates for September and negative investor sentiment for the iPhone maker's current state potentially making decent results for the next quarter seem better.

In the latest note to investors seen by AppleInsider, Morgan Stanley is being positive about Apple's shares, in part due to low current expectations for the company's performance in the September quarter. Analysts have four main reasons for their "positive bias into June quarter earnings," which has also prompted a raise in price target from $231 to $247 for the "Overweight"-rated stock.

The first main reason is "unusually negative" investor sentiment, with call volume for the quarter deemed to be low despite a 20% share bounce back from May's low.

The persistent undervaluing of Apple's Services has been a big red flag to Morgan Stanley in its reports. For example, following April's announcements of new services, the Street was seen to be skeptical on a lack of apparent detail from the plans, prompting them to leave revenue forecasts unchanged despite the increased number of Services items by the end of 2019.

Morgan Stanley believes the consensus estimates for the September quarter imply a low bar, as supply chain reports suggest the builds for September are higher than the firm's own forecast. Add in the consensus modeling of Apple's services growth deceleration on a background of App Store issues in China being eased, such as authorities granting gaming licenses following a one-year ban, and that makes the Street's dour outlook seem to be harsher than it could be.

June quarter iPhone data also held up in the company's own checks, such as with improvements in China from the March quarter and relatively consistent checks for domestic US sales. The firm's forecast is 37 million iPhone shipments in the June quarter, down 10% year-on-year, translating into $26.2 billion in iPhone revenue, down 11% from the same quarter last year.

Lastly, there is the firm's expectation the June quarter Services revenue will accelerate by 3 points for the first time since the March 2018 quarter. In theory, this is a "key catalyst" in regaining investor confidence in a Services narrative.

Morgan Stanley's model for Services puts revenue at $11.9 billion, up 16.7% year-on-year as reported. Combining the Chinese App Store restriction easing by the government, and the yet-to-launch Apple TV+, Apple Arcade, and Apple Card, these should improve the Services arm's finances even more towards the end of the year.

Previously, Morgan Stanley suggested the introduction of the new bundles could return Apple to a trillion-dollar valuation.

While Morgan Stanley has championed Services as a revenue generator for Apple, other firms are continuing to see iPhones as the main point of analysis for the shares. In one example, Rosenblatt Securities recently downgraded Apple to "sell" over the belief the iPhone sales will be disappointing for the second half of 2019, despite the potential promise of Services.

For the moment, Morgan Stanley's forecast for September revenue is $61.3 billion, down 3% year-on-year, with a gross margin of 37.7%. For the more immediate June quarter, the revenue forecast has been adjusted slightly up to $53.8 billion, up 1% year-on-year, with unchanged revenue and EPS.

Apple will announce its Q3 2019 earnings on July 30.