AAPL remains top pick for Morgan Stanley due to long-term prospects

Morgan Stanley is retaining Apple as a top pick in the wake of the company's March quarter earnings, which solidified the investment bank's positive outlook for the long-term.

In a note to investors seen by AppleInsider Friday, lead analyst Katy Huberty said that Morgan Stanley's confidence in Apple's sustainable long-term growth remains unchanged.

That thesis is based on a trio of factors, including a stretched iPhone replacement cycle and the upcoming rumored released of a 5G "iPhone 12" in the fall, an upside to Services revenue and Apple's overall strong balance sheet. Huberty notes that Apple's March quarter results gives Morgan Stanley several reasons to adjust their estimates going forward, even in lieu of the lack of June guidance from Apple.

For one, demand trends for Apple products are already showing signs of recovery. Revenue trends improved in March and again in April in China, while global demand also increased steadily in the second half of April.

The investment bank already modeled deteriorating iPhone and Wearables revenue in the June quarter, but Huberty points out that Mac and iPad growth trends are actually expected to improve on a year-over-year basis — a metric that is ending up better than the firm originally predicted.

"Net, we raise our Mac iPad and Wearables forecast, lower Services growth, and keep our iPhone estimates relatively unchanged," Huberty wrote.

While product mix shift and currency headwind are driving Morgan Stanley's margin forecast lower in the short-term, Huberty adds that Apple is remaining committed to shareholder return and investments for long-term growth.

The investment bank's base case forecasts sustained Services growth and 5G iPhone upgrade cycle driving double-digit revenue growth throughout 2021.

Morgan Stanley has raised its 12-month price target to $326, up from $298. That's based on an enterprise value-to-sales (EV/Sales) multiple of 3.7x on Apple's mature iPhone, iPad and Mac business, a 3.8x EV/Sales multiple on Wearables, Home and Accessories, and a 7.1x EV/Sales multiple on Services.

Huberty said that this results in a 4.4x target EV/Sales multiple and a 21.8x price-to-earnings multiple for the 2021 fiscal year.

Shares of Apple were trading at $289.40 on the NASDAQ Friday, down 1.49%. The NASDAQ itself was down 2.67% as of publication time.