Apple’s (NAS:AAPL) March-quarter revenue rose 5% year over year to $95.4 billion, with iPhone revenue rising 2% to $46.8 billion. March-quarter gross margin rose 50 basis points year over year to 47.1%. June-quarter guidance calls for modest year-over-year revenue growth and sequential margin contraction.

Why it matters: Results and revenue guidance were positive to us, but margin guidance was weak, resulting from an estimated $900 million impact from US tariffs. As primarily a hardware company, we see material risk for Apple from tariffs, both on profitability and longer-term demand.

  • Apple’s core devices are currently exempt from US tariffs, and the June quarter impact is primarily from accessories. Nonetheless, Apple remains at risk of a policy change. Positively, most US iPhone units are imported from India, which faces a lower current tariff rate than China (10% vs 145%).
  • Management noted no signs of customers accelerating purchases in advance of potentially higher costs from tariffs. We still surmise this is happening, but mostly on the margin. We also like that Apple is building up its own inventory to bring in lower-cost products as a precautionary measure.

The bottom line: We maintain our $200 fair value estimate for wide-moat Apple. We lowered our short-term profit forecast to reflect direct tariff costs, but maintain our base-case expectation for Apple to earn an exemption from US tariffs in the long term. We see shares as fairly valued.

  • We estimate a 25% gross downside risk to earnings and Apple’s intrinsic valuation if it were to lose its exemption and face the full brunt of tariffs. This gross estimate assumes no mitigation actions from Apple, and a 145% rate for imports from China.
  • We wouldn’t expect Apple to swallow this entire downside risk, as we would expect the firm to raise prices in the US and accelerate moving US import production into other countries like India.

Apple bulls say

  • Apple offers an expansive ecosystem of tightly integrated hardware, software, and services, which locks in customers and generates 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 sends great amounts of cash flow back to shareholders.

Apple 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.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.