Morgan Stanley: Apple’s hardware revenue guidance is strong, but services growth and gross margins are under pressure

Why did hardware demand help revenue guidance beat expectations?

Apple expects revenue to grow 7%–10% year over year in the December 2026 quarter, with the midpoint of its guidance about 2.6 percentage points above Morgan Stanley and market expectations. Revenue grew 16% in the same quarter last year, and this year there are fewer new flagship models and supply remains constrained; the guidance indicates that product demand and pricing remain supported.
In the reported September quarter, Apple’s total revenue was $114.477 billion, up about 12% year over year. iPhone revenue was $57.583 billion, up 17%, and Mac revenue was $10.792 billion, up 24%.
Morgan Stanley expects iPhone and Mac to continue driving growth in the December quarter, with pricing potentially contributing more than the entire year-over-year revenue increase. Channel inventories of iPhone, Mac and iPad are below target, but Mac and iPad face memory-related shortages, and supply of the new iPhone Duo is also constrained; reaching the high end of guidance will require improved supply.

Apple’s services revenue grew 9.8% year over year in the September quarter; the company expects growth to slow further to 8%–9% in the December quarter, 2–2.5 percentage points below market expectations.
Management attributed the slowdown primarily to sequential pressure on third-party licensing revenue and an additional foreign-exchange headwind of about 0.5 percentage points; weakness in mobile gaming and changes to the App Store business model also pose challenges. Morgan Stanley believes these trends will intensify discussion about AI’s impact on the services business.
Morgan Stanley expects services revenue growth to slow to 7% year over year in the quarter ending March 2027 due to a higher year-ago comparison base, before recovering slightly in the second half of the fiscal year; it forecasts full-year growth of 9.3% in fiscal 2027, below 13% in fiscal 2026. The company sees more than 2.5 billion active devices, more than 1.5 billion paid subscriptions and future AI monetization as long-term opportunities.

Apple’s overall 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 approximately $1 billion in tariff refunds; after adjusting that assumption, its forecast is close to 45.8%.
Even 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 rising memory costs, which 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, while the benefit of lower-cost inventory gradually fades. Higher cloud inference costs from the deployment of Siri AI will also weigh on services gross margin, but Morgan Stanley believes their impact is relatively small compared with memory costs. The bank forecasts an overall gross margin of 46.4% for fiscal 2027, below 48.8% in fiscal 2026.

The stronger revenue outlook is offset by weaker services growth and gross margins. Morgan Stanley lowered 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, still equivalent to 35 times forecast calendar 2027 earnings per share. Morgan Stanley values Apple’s operating stability and cash-flow predictability, but also noted limited upside from the $338.32 closing price listed in the report to the new target.