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Analyst’s Notes
Analysis by Jim Kelleher, CFA, September 14, 2021
ARGUS RATING: BUY

• New iPhones, ruling in App Store case; reiterating BUY
• Apple has introduced its second-generation 5G iPhone, the iPhone 13 family.
• The new phones are similar in appearance to the predecessor iPhone 12 lineup, but they offer better
cameras, faster processing, and enhanced data storage options at the same prices as last year’s
models.
• The new iPhone family faces tough comparisons with a year ago, when the world was stuck at home
just in time for the first generation of 5G phones.
• At the same time, Apple continues to grow its services and wearable businesses faster than its
mature products businesses.

INVESTMENT THESIS

BUY-rated Apple Inc. (NGS: AAPL) has introduced its second-generation 5G iPhone, the iPhone 13. The new phones are similar in appearance to the predecessor iPhone 12 lineup, but they offer better cameras, faster processing, and enhanced data storage options at the same prices as last year’s models.

Apple also launched new iterations of Apple Watch (Series 7) and a range of new iPads. The expected introduction of Air Pods 3 did not happen, however. Wearable and consumer products have become the fastest-growing product categories for Apple. They also help broaden the number of consumers in the Apple-verse for iPhones, Macs, iPads, and apps and services. We still expect Apple to launch Air Pods 3 before the holiday season.

Apple appears to have won most points in its legal battle with Epic Games, which has long fought against Apple’s pricing policies and practices in its App Store. Based on the ruling issued on 9/10/21, Judge Yvonne Gonzalez Rogers favored Apple on nine of ten counts, allowing Apple to mostly keep intact its basic royalty model. The judge, however, found against Apple regarding its anti-steering policies that prevent developers from alerting consumers to potential use of other payment systems.

Use of external payment systems will allow developers to reduce royalties paid to Apple. We expect most developers to remain fully within the App Store payment ecosystem, however, given the costs, security risks, and other obstacles to setting up payment systems outside the Apple ecosystem. In our view, Apple’s total Services revenue (which includes App Store) will not be much impacted by the outcome of
this case.

While Apple did not reinvent the iPhone this year, its continuous upgrades make for a family of elegant devices. For the long term, we expect Apple to continue building on its franchise leadership in smartphones, compute products (Mac and iPad), and consumer goods (Air Pods, Watch, Home), while continuing to grow its services ecosystem of App Store, iCloud, Apple Pay, Apple TV+, and multiple other offerings.

After more than a decade of outperformance, AAPL has had a quiet and market-lagging start to the calendar year. In our view, the relative underperformance reflects sector rotation, not any misfires in Apple’s leadership franchises. We therefore regard the underperformance as an opportunity to establish or dollar-average into positions in AAPL. We are reiterating our BUY rating and 12-month target price of $165.