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Demand for Apple products isn't the problem. What's causing the bank's bottom line to slip is a services business approaching a symbolic threshold and a gross margin that appears more stable than it actually is. This doesn't change the rating, however.
Following the release of the third-quarter results, analysts are revising their models. Morgan Stanley lowered its price target from $364 to $360 while maintaining its "overweight" rating. The move itself is small, but the reasoning is not: The bank bases its Apple valuation on three pillars – iPhone, services, and gross margin – and two of these are now under pressure. Accordingly, its earnings estimate for fiscal year 2027 has been reduced from $10.39 to $10.00 per share.
Only one pillar still bears full weight
The iPhone remains the strong performer. Revenue reached a June quarter record of $54.3 billion, Mac sales increased by 29 percent, and Apple reported record highs in both its active device base and the number of users upgrading to a new model. Analyst Erik Woodring interprets this as a signal that extends beyond the quarter: Replacement cycles could be shortening again after years of customers keeping their devices for increasingly longer periods.
Supply chain audits support this interpretation. Apple has not withdrawn its production plans for the second half of calendar year 2026 – an indication that the company still expects customers to switch, even if higher prices test demand.
The services sector is approaching a threshold
The second pillar is faltering. Services reached $30.7 billion in the June quarter, a 12 percent increase – the bank had expected 14.6 percent. For the September quarter, it now anticipates around 9.5 percent. That would be the first figure below the 10 percent mark since the June quarter of 2023.
Profitability in the division is also declining: The gross margin in the services business fell from 76.7 percent in the March quarter to 75.6 percent in the June quarter. For Morgan Stanley, this confirms a long-held theory – the App Store is no longer pulling the rest of the division upwards, but rather holding it back. When asked, Apple cited weaker activity in mobile games, irregular release schedules, ongoing legal proceedings, and changes to the business models of the App Store in individual countries. No single factor could be identified to pinpoint exactly why the division underperformed.
Why Europe appears twice in this calculation
For readers in Germany, two of the aforementioned factors slowing growth are particularly revealing because both are directly related to Europe. Morgan Stanley attributes the majority of the slowdown to exchange rate effects. Apple reports its financials in dollars, and a strong euro makes European revenues appear smaller in the company's accounts, even though not a single subscription has been sold less. The reported decline therefore partially reflects currency fluctuations and not the behavior of European customers.
The second point carries more weight because it is permanent. When Apple cites changing business models in the App Store of individual countries as a hindrance, it is referring to the regulatory-enforced openings – primarily those in the EU. Commissions that are no longer charged there, or only at a reduced rate, do not return when the exchange rate changes. The service business in Europe is therefore growing structurally under different conditions than in the US. It is consistent with this that Siri AI is not launching on iPhones and iPads in the EU for the time being – precisely the feature from which Apple expects additional revenue through higher AI quotas in paid iCloud+ tiers. In Switzerland, which is neither in the EU nor the EEA, Siri AI is launching as planned. According to the bank's assessment, no measurable effect of AI is yet discernible in either product demand or the service business.
The gross margin looks better than it actually is
Apple is forecasting a gross margin of 47 to 48 percent for the September quarter. However, this range includes a one-off effect: refunds from paid customs duties contribute approximately one percentage point. Excluding this, the underlying average is around 46.5 percent – about 1.5 percentage points lower than the June quarter.
This is the real turning point. Historically, during this seasonal transition, Apple's gross margin has either remained constant or increased by up to half a percentage point. A decline of this magnitude has not been seen recently. Management stated the reason unequivocally: Increased storage costs outweigh the entire decline; savings on other components and a more favorable product mix could not offset them. In the short term, the bank is counting on price increases and the foldable iPhone to counteract the decline in the December quarter. Apple has not announced either – and the bigger question remains whether storage inflation will delay a sustained margin recovery until fiscal year 2027.
What the price would need to recover on
The revised target price of $360 is derived from estimated earnings of $10.30 per share for calendar year 2027 and an unchanged valuation multiple of approximately 35. On July 30, prior to the earnings release, the stock closed at $333.43.
Four triggers could reverse the trend: new iPhones, the actual launch of Siri AI, regulatory decisions, and rising profit estimates. Unless any of these materialize, Morgan Stanley expects the stock to come under pressure – for a company whose growing device base, cash generation, and forays into healthcare, payment services, and the connected home remain positive in the long term. The bank is not lowering its rating on Apple itself, but rather on the next two quarters. (Image: Shutterstock / Xeniia X)
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