Apple’s (NAS: AAPL) September-quarter revenue beat guidance, rising 12% year on year to $114 billion. Gross margin rose 70 basis points year on year to 47.9%, with a one-time tariff refund benefit. Revenue for iPhone rose 18% year on year. December revenue is guided to high-single-digit year-on-year growth.

Why it matters: Results were good, but the biggest stories are margins and supply. Margins are pressured by memory cost inflation, partially offset by Apple’s price increases. We expect price to lead revenue growth in 2027. Revenue is also constrained by limited supply of logic and memory chips.

  • IPhone growth looks to be decelerating after 2026, but remaining positive. We expect unit sales to be flat in 2027, with an evolutionary iPhone 18 family and higher prices. We expect high-single-digit iPhone revenue growth in 2027, almost entirely from pricing.
  • We like Apple’s artificial intelligence strategy, and agree with management that Apple devices are the premier place for consumers to use AI. We also like that the firm is foregoing the frontier model race to focus on integrating AI into features users will love. Still, we doubt AI can materially raise unit sales.

The bottom line: We maintain our $290 fair value estimate for wide-moat Apple, with our long-term thesis for moderate long-term growth and margin expansion intact. Shares dipped about 3% after-hours, but remain moderately overvalued to us.

  • We project margins compressing about 2 points in fiscal 2027 from memory inflation. We like Apple’s move to raise prices but share the pain with its customers via margin compression. We project margins to rebound in 2028 and beyond as memory prices come back to earth.
  • Apple is up 25% year-to-date, and just shy of all-time highs. We agree with the market’s tacit approval of the AI strategy, but we don’t think AI will enable Apple to raise unit sales. We see good AI features keeping customers in the iOS ecosystem, but not accelerating refresh cycles.

Apple’s walled garden is well-positioned for the AI era

We believe Apple holds a dominant position at the forefront of the consumer electronics industry, focusing on a premium ecosystem of tightly integrated hardware, software, and services. We see the flagship iPhone as the linchpin of this ecosystem, from which Apple derives pricing power, switching costs, and a network effect. In our view, every other Apple device and service derives its greatest value from further locking in customers to this walled garden. This approach earns the firm Morningstar Economic Moat Rating of Wide.

We are impressed by Apple’s design prowess, across both hardware and software, which we think is the product of immense cumulative research and development investments. We like Apple’s push to bring most of its chip development in-house. To us, this gives the firm greater opportunities for product customization and a better ability to differentiate. In our view, Apple reduces its own cyclicality compared with other consumer electronics players by melding its semiconductors, hardware, and software together.

Over the medium term, we expect Apple to focus on advancing its internal chip development, artificial intelligence capabilities, and the development of new form factors. Each one of these initiatives will hedge the firm against disruption risk, in our view. We also anticipate the company will continue to return substantial amounts of cash to shareholders, supported by its strong balance sheet.

We have concerns over geopolitical and regulatory risk for Apple but don’t see these threatening the firm’s moat presently. Apple’s supply chain is heavily concentrated in China and Taiwan, and disruptions in these regions, including tariffs, could limit its supply or profitability. Apple has thus far been adept at managing its complex supply chain and is actively diversifying into new regions, such as India and the US. Apple has also been targeted by antitrust regulation, which threatens its profitability from services such as the App Store. We don’t anticipate severe rulings that would be detrimental to Apple’s moat or core business, but we could see headwinds to its services profitability in the medium term.

Bulls say

  • Apple offers an expansive ecosystem of tightly integrated hardware, software, and services that locks in customers and drives strong profitability.
  • We like Apple’s move to in-house chip development, which we think has accelerated its product development and increased its differentiation.
  • Apple has a stellar balance sheet and returns substantial cash flow to shareholders.

Bears say

  • Apple is prone to consumer spending and preferences, which creates cyclicality and opens the firm up to disruption.
  • Apple’s supply chain is highly concentrated in China and Taiwan, which opens up the firm to geopolitical risk. Attempts to diversify into other regions may pressure profitability or efficiency.
  • Regulators have a keen eye on Apple, and recent regulations have chipped away at parts of Apple’s sticky ecosystem.