Morgan Stanley: Apple’s revenue guidance beats expectations, while slowing services growth and rising costs pressure margins

Why did hardware performance lift revenue guidance above expectations?

Apple reported revenue of $114.477 billion for the fourth quarter of fiscal 2026, the quarter ending in September, up 12% year over year and about 1% above Morgan Stanley’s expectation. Earnings per share were $2.10, above the bank’s forecast of $1.99.
iPhone revenue rose 17% year over year and Mac revenue grew 24%, while iPad revenue fell 10% and wearables, home and accessories revenue declined 8%.
Apple expects revenue to grow 7%–10% year over year in the December quarter, with the midpoint of its guidance about 2.6 percentage points above Morgan Stanley’s and market expectations. Fewer new flagship models are available for launch in the same period, and supply remains constrained.
Morgan Stanley believes iPhone and Mac remain the main drivers of growth and that price increases could contribute more than the entire year-over-year revenue increase in the December quarter. Channel inventories for iPhone, Mac and iPad are all below target, but Mac and iPad face memory shortages, and supply of the new iPhone Duo is also constrained. Reaching the upper end of guidance will require improved supply.

Apple expects services revenue to grow 8%–9% year over year in the December quarter, 2 to 2.5 percentage points below market expectations and below the actual 9.8% recorded in the September quarter.
Management said third-party licensing revenue and exchange rates were sources of pressure, while weakness in mobile gaming and changes to the App Store business model were also challenges. Morgan Stanley expects continued pressure and a higher year-earlier comparison base to bring services growth down further to 7% in the March 2027 quarter, followed by a modest recovery in the second half of the fiscal year.
Long-term opportunities come from more than 2.5 billion active devices, more than 1.5 billion paid subscriptions, penetration in emerging markets and future monetization of AI services. The bank expects services revenue to grow 9.3% in fiscal 2027, falling below 10% for the first time since fiscal 2023.

Apple’s gross margin guidance for the December quarter is 45%–46%, with the midpoint 1 percentage point below Morgan Stanley’s previous forecast. The bank had previously included about $1 billion in tariff refunds; after adjusting that assumption, its original forecast was close to 45.8%.
On a basis excluding tariff refunds, the guidance midpoint is still about 1.4 percentage points below the 46.9% recorded in the September quarter. The main reason is that rising memory costs outweigh the benefits of product price increases, lower-cost inventory and price declines for other components.
Management expects memory price increases to continue beyond the December quarter and the benefit of lower-cost inventory to gradually fade. Higher cloud inference expenses from the rollout of Siri AI further reduce services gross margin, although Morgan Stanley considers their impact relatively smaller than that of memory costs.
The bank expects overall gross margin of 46.4% in fiscal 2027, down from 48.8% in fiscal 2026. Pricing, lower costs for other components and changes in the business mix are unlikely to fully offset cost pressures in the short term.

An improved revenue outlook is offset by pressure on services and gross margins. Morgan Stanley cut its fiscal 2027 earnings-per-share forecast by $0.05 to $9.85, and its calendar 2027 forecast by $0.16 to $10.00.
The bank maintained its Overweight rating and lowered its price target from $355 to $350. The new target implies a price-to-earnings multiple of 35 times forecast calendar 2027 earnings per share. The bank continues to value the stability of Apple’s operations and the predictability of its cash flow, but sees limited upside from the $338.32 closing price on 2 November.