Services, iPhone 12 Pro performance foreshadowing strong Apple holiday quarter

In a note to investors seen by AppleInsider, lead analyst Katy Huberty writes that recent App Store growth and iPhone 12 Pro lead times continue to support Morgan Stanley's bullish outlook for Apple's holiday quarter.

The analyst estimates that the App Store's net revenue grew 31% year-over-year in the December quarter to $5.3 billion. That's about the same as growth during the September quarter and is 350 basis points ahead of Huberty's own 27.5% year-over-year quarterly forecast.

In the previous six months, App Store growth remained broad-based with all 10 of the top App Store markets growing at least 20% from the previous year. There were also notable accelerations in China and Japan. Increased new revenue per download shows a potential uptick in monetization.

"If we keep the rest of our December quarter Apple Services forecast unchanged, the latest App Store data would imply December quarter Services revenue of $14.84B (+16.7% Y/Y), $170M or 130bps ahead of our $14.67B estimate (+15.4%), and 40bps ahead of consensus at $14.78B (+16.2%)," Huberty writes.

She notes that this would suggest Services growth had accelerated for two consecutive quarters. That would likely put "upward pressure on consensus FY21 Services forecasts."

Lead times for the iPhone 12 Pro and iPhone 12 Pro Max are also setting new records heading into 2021.

As of Jan. 5, 2021, iPhone 12 Pro lead times remained at three weeks. At this point in all prior iPhone cycles in the past four years, lead times clocked in at one day. Lead times for the iPhone 12 Pro Max also stayed elongated at 4.4 days, the second longest among iPhone models.

Lead times for the iPhone 12 and iPhone 12 mini were much more in line with past Apple handset cycles, coming in at about one to three days. However, Huberty points out that the lower-cost iPhones are likely performing better in international markets like China, where carrier subsidies and trade-in adoption lags behind the U.S.

"This data reinforces our bullish iPhone outlook ... and helps refute recent investor concerns of weaker C1Q21 A14 chip orders that were rumored prior to the holidays," the analyst adds.

Morgan Stanley is also closely monitoring other data points, such as the closure of Apple retail stores and current PC channel inventory units.

Apple has recently re-shuttered 105 Apple Store locations, or about 20% of its retail footprint, because of worsening coronavirus situations across the globe. Specifically, closures occurred in California, the U.K., Germany, and Italy.

Notebook inventory levels also increased 2.8x over the prior three weeks. Apple saw the greatest channel fill in this sector as the supply of M1 Mac and MacBook models improved.

Huberty maintains her 12-month AAPL price target of $144, based on a sum-of-the-parts model by applying a 5.5x enterprise value-to-sales (EV/Sales) multiple on Apple's product business and a 13.6x EV/Sales multiple on Services. That results in an implied 7x EV/Sales multiple for the 2021 fiscal year and a 32x enterprise value to free cash flow multiple.

Shares of AAPL were trading at $129.30 on the NASDAQ as of 11 a.m. Eastern, down 1.21%.