Morningstar Report-636d1777e26a17cb579912df

Morningstar Equity Analyst Report | Report as of 1 Jul 2023 05:49, UTC | Reporting Currency: USD | Trading Currency: USD
| Exchange: NASDAQ - ALL MARKETS Page 1 of 22
Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC
TM TM
Last Price Fair Value Estimate Price/FVE Market Cap Economic Moat Moat Trend Uncertainty Capital Allocation ESG Risk Rating Assessment1
193.97 USD 150.00 USD 1.29 3.05 USD Tril Wide Stable High Exemplary ;;;;;
30 Jun 2023 7 Jun 2023 05:00, UTC
30 Jun 2023 20 Jan 2023 17:37, UTC
Price vs. Fair Value
Last Close: 193.97

200 Fair Value: 150.00
20 Jan 2023 17:37, UTC
150 Over Valued

Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.79 1.33 1.56 1.43 1.00 1.29 Price/Fair Value
-5.12 88.09 81.85 34.48 -26.32 49.65 Total Return %
Morningstar Rating
Total Return % as of 30 Jun 2023. Last Close as of 30 Jun 2023. Fair Value as of 20 Jan 2023 17:37, UTC.
Contents
Analyst Note (6 Jun 2023) Apple: Vision Pro Points to the Future of AR, but Won’t
Business Description
Business Strategy & Outlook (25 May 2023) Displace the iPhone Just Yet
Bulls Say / Bears Say (25 May 2023)
Analyst Note Brian Colello, CPA, Sector Director, 6 Jun 2023
Economic Moat (25 May 2023)
Fair Value and Profit Drivers (25 May 2023)
As expected, Apple’s Worldwide Developers Conference keynote was highlighted by Apple Vision Pro,
Risk and Uncertainty (25 May 2023) the company’s augmented reality headset expected to arrive in early 2024. We maintain our $150 fair
Capital Allocation (25 May 2023) value estimate for Apple, as we don’t envision the company selling enough units of these devices to
Analyst Notes Archive move the needle on its massive valuation, which is still dominated by the far more pervasive iPhone.
Financials
Appendix At first glance, we’re impressed with the design and technological capabilities of Vision Pro and its
Research Methodology for Valuing Companies
operating system. Yet we didn’t see a “must-have” use case that will lead tens of millions of people to
Important Disclosure rush out to buy this device, especially given the high price tag ($3,499) and limited battery life (up to
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and two hours when untethered). In our view, some technological constraints, such as battery life and
Investment Research Policy. For information regarding conflicts of interest, please
visit: http://global.morningstar.com/equitydisclosures.
processing power, may prevent Apple and its peers from fully bringing their AR or virtual reality dreams
The primary analyst covering this company does not own its stock.
to life right away. In turn, we’re not yet convinced that AR/VR will materially displace PC or smartphone
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk

1
usage just yet.
Rating.
However, if AR/VR were to encroach on traditional computing use cases, the WWDC announcements
give us confidence that Apple won’t be left behind. In an AR/VR landscape with rising competition over
the next decade, we expect Apple to be a leader, thanks to its expertise in hardware, software, services,
and semiconductors, all of which were on display at WWDC. Vision Pro will be aided by having pre-
existing apps available on the device on Day 1. While the “must-have” use case for AR/VR headsets
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Morningstar Equity Analyst Report | Report as of 1 Jul 2023 05:49, UTC | Reporting Currency: USD | Trading Currency: USD | Exchange: NASDAQ - ALL MARKETS Page 2 of 22
TM TM
30 Jun 2023 7 Jun 2023 05:00, UTC
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might not exist today, if it arrives, we think it’s quite likely that it will originate on Apple’s Vision Pro
Sector Industry
platform, given Apple’s internal capabilities and potent developer network.
a Technology Consumer Electronics
Business Description Business Strategy & Outlook Brian Colello, CPA, Sector Director, 25 May 2023
Apple designs a wide variety of consumer electronic Apple’s consumer hardware dominance stems from its ability to package hardware, software, services,
devices, including smartphones (iPhone), tablets (iPad),
semiconductors, and third-party applications into sleek, intuitive, and appealing devices. This expertise,
PCs (Mac), smartwatches (Apple Watch), and AirPods,
among others. In addition, Apple offers its customers a
coupled with its walled garden approach for its unique iOS ecosystem, enables the firm to capture a
variety of services such as Apple Music, iCloud, Apple premium on its devices, unlike most of its peers that rely on open operating systems, Windows and
Care, Apple TV+, Apple Arcade, Apple Fitness, Apple Android, in particular. We see no other technology titan with comparable expertise across consumer
Card, and Apple Pay, among others. Apple's products hardware, software, services, and chip design. In turn, we believe this integration allows Apple to build
include internally developed software and
premium devices that command industry-leading average selling prices and margins, most notably the
semiconductors, and the firm is well known for its
firm’s crown jewel: the iPhone.
integration of hardware, software, semiconductors, and
services. Apple's products are distributed online as well
We think high customer switching costs, intangible assets, and network effects support Apple's wide
as through company-owned stores and third-party
retailers. economic moat. Switching costs from iOS are as strong as ever thanks to more auxiliary products and
services that make switching away from iOS more difficult over time, while a non-Apple iOS experience
does not exist, unlike computing platforms for the Windows or Android ecosystems that boast devices
from a multitude of firms. Regarding intangible assets, Apple’s differentiated user experience via iOS,
coupled with its broad design expertise, allows the firm to build vertically integrated products more
seamlessly. We also see network effects around iOS and its 1 billion-plus installed base with new app
development favoring iOS.
We view the iPhone as a revolutionary product that created the smartphone ecosystem and transitioned
computing habits away from the PC. The robust app store helped foster iPhone adoption and grow
Apple’s user base, with applications ranging from productivity, social media, shopping, gaming, music,
and so on. Going forward, we expect Apple to better monetize its captive user base via supplemental
products and services (Apple Watch, Apple Music, Apple TV+, AirPods, iCloud, Apple Pay, and so on)
that will evolve into a more robust recurring revenue stream.
Bulls Say Brian Colello, CPA, Sector Director, 25 May 2023

u Between greater smartphone penetration in emerging markets and repeat sales to current customers,
Apple has plenty of opportunity to reap the rewards of its iPhone business.
u Apple's iPhone and iOS operating system have consistently been rated at the head of the pack in terms
of customer loyalty, engagement, and security, which bodes well for long-term customer retention.
u We think Apple is still innovating with introductions of Apple Pay, Apple Watch, Apple TV, and AirPods;
each of these could drive incremental revenue, but more crucially help to retain iPhone users over time.
Bears Say Brian Colello, CPA, Sector Director, 25 May 2023

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TM TM
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Competitors
Apple Inc AAPL Alphabet Inc Class A GOOGL HP Inc HPQ Microsoft Corp MSFT
Last Close
Fair Value
193.97 154.00 Last Close Last Close
Uncertainty : High 30.71 340.54
Fair Value Fair Value Fair Value
150.00 Last Close 30.00 325.00
Uncertainty : High 119.70 Uncertainty : High Uncertainty : Medium
Economic Moat Wide Wide None Wide

Moat Trend Stable Stable Negative Stable
Currency USD USD USD USD
Fair Value 150.00 20 Jan 2023 17:37, UTC 154.00 3 Feb 2023 10:57, UTC 30.00 7 Nov 2022 15:52, UTC 325.00 26 Apr 2023 04:03, UTC
1-Star Price 232.50 238.70 46.50 438.75
5-Star Price 90.00 92.40 18.00 227.50
Assessment Over Valued 30 Jun 2023 Under Valued 30 Jun 2023 Fairly Valued 30 Jun 2023 Fairly Valued 30 Jun 2023
Morningstar Rating QQ30 Jun 2023 21:16, UTC QQQQ30 Jun 2023 21:16, UTC QQQ30 Jun 2023 21:16, UTC QQQ30 Jun 2023 21:16, UTC
Analyst Brian Colello, Sector Director Ali Mogharabi, Senior Equity Analyst William Kerwin, Analyst Dan Romanoff, Senior Equity Analyst
Capital Allocation Exemplary Exemplary Standard Exemplary
Price/Fair Value 1.29 0.78 1.02 1.05
Price/Sales 8.08 5.48 0.55 12.27
Price/Book 49.04 5.83 — 13.01
Price/Earning 32.85 26.60 11.50 36.89
Dividend Yield 0.48% — 3.38% 0.78%
Market Cap 3,050.90 Bil 1,527.29 Bil 30.28 Bil 2,532.08 Bil
52-Week Range 124.17—194.48 83.34—129.04 24.08—35.32 213.43—351.47
Investment Style Large Growth Large Growth Mid Value Large Growth
u Apple’s decisions to maintain a premium pricing strategy may help fend off gross margin compression
but could limit unit sales growth, as devices may be unaffordable for many customers.
u If Apple were to ever launch a buggy software update or subpar services, it could diminish the firm's
reputation for building products that "just work."

u Apple is believed to be behind firms like Google and Amazon in artificial intelligence, or AI, development
(notably Siri voice recognition), which could be problematic as tech firms look to integrate AI in order to
deliver premium services to customers.
Economic Moat Brian Colello, CPA, Sector Director, 25 May 2023

We assign a wide economic moat rating for Apple that stems from the combination of switching costs,
intangible assets, and network effects associated with its iOS ecosystem. Combined with an asset light
business model, we think it is nearly certain that Apple will generate excess returns on capital over the
next decade and more likely than not over the next 20 years.
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We think the firm's primary moat source stems from high customer switching costs, based on a variety
of aspects of Apple's hardware, software, and services. First, we think about the risk of customers
moving away from today's electronic devices, such as smartphones. We view the smartphone as the
most essential computing device for users, and despite innovations in other types of electronic devices
like smart speakers, AR/VR headsets, and the Internet of Things, we don't see the smartphone going
away anytime soon. The smartphone has already replaced a host of standalone electronics devices
(standalone cameras, MP3 players, portable game consoles, and so on) while emerging as the primary
portal with an intuitive interface for many other digital services (email, books, web browsing, shopping,
social media, videos, and more) in a pocket-sized form factor. Apple's iPhone fostered the industry, has
maintained its position as the premier smartphone, and we expect the firm to increasingly monetize its
valuable installed base with the iPhone as the catalyst.
Beyond the iPhone, Apple's other key hardware products such as the iPad, Mac, Watch, and AirPods
each fill a computing niche that enhances the experience of the user. We do not foresee Apple's
primary electronic devices (smartphones, tablets, PCs, wearables, hearables) becoming irrelevant.
Concerning the risk of iOS losing ground to new and existing operating systems, most notably Google's
Android, the world's largest mobile operating system in terms of users, we view Apple's market position
as secure.
Perhaps the stickiest aspect of the Apple iPhone is the integration of iOS across multiple devices. Users
of ancillary products (including the iPad, Mac, Watch, and AirPods) lose significant functionality when
paired with a smartphone other than the iPhone. For example, an iMessage will show up on an iPhone,
iPad, Mac, and Watch if all are owned by a customer. We do not believe these other hardware products
(iPad, Mac, Watch, AirPods) are wide-moat businesses in and of themselves, but together with the
iPhone they create a formidable customer lock-in as the experience between multiple devices
diminishes if one is not on iOS. Wearables such as AirPods and the Apple Watch have also disrupted
their respective predecessor industries and have created another expensive hook to keep customers tied
to Apple's ecosystem. Apple's active installed base (iPhone, Mac, and iPad) reached 1.8 billion at the
end of 2021, up 9% from a year prior, highlighting the growing adoption of multiple iOS products by
individuals.
Furthermore, if an iPhone user were to switch away to an Android device, they would lose significant
functionality with other iOS users (that is iMessage texts from Android OS turning green or lack of
AirDrop to share files conveniently). iMessage, FaceTime, Apple Pay, Apple Music, and Apple TV+ are
just some of Apple's services which, to varying degrees, provide users with a seamless experience that
ties them to iOS. As Apple adds more software and services to its iOS ecosystem over time, the risk of
disruption here for each user only intensifies.
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We also see other areas where the time, effort, expense, and risk of switching away from iOS precludes
most users from switching. We believe this inertia is driven by a disinclination for learning a new user
interface, re-downloading apps, risking data loss, re-logging into accounts, and other headaches of
disrupting an essential device like a smartphone.
For all these reasons, we think existing iPhone users are relatively locked in to the iOS ecosystem. We
have seen little evidence of disruption to iOS stickiness on the services front in recent years, and we see
no signs of this dynamic changing. A variety of survey data shows that iPhone customers are not even
contemplating switching brands today. In a 2021 survey by Consumer Intelligence Research Partners,
over 90% of U.S.-based iPhone users said they planned to remain loyal to future Apple devices. An
October 2022 survey from 451 Research indicated iPhone customer satisfaction of 98%.
Beyond switching costs, we believe Apple's expertise in hardware, software, semiconductors, and
services represents an intangible asset that even the strongest of tech firms have struggled to replicate.
While the Android cohort has replicated a similar feel of apps, app stores, and integrated experience,
we have not seen third parties within the Android ecosystem work well enough together to deliver
devices and services that are clearly superior to Apple. Competitors such as Samsung (Galaxy
smartphone) and Google (Android OS) specialize in hardware and software, respectively, with Samsung
boasting leadership in mobile device units and Google's Android OS serving as the pervasive
smartphone OS. However, neither Samsung nor Google has been able to offer a comprehensive and
integrated product like the iPhone on its own, though both have attempted to develop software/
operating systems (Samsung's Tizen OS) and hardware (Google's Pixel smartphone), with subpar results.
We view Apple's chip design expertise and tightknit partnership with TSMC as another intangible asset
instrumental to its success. Powering all its devices are Apple's internally designed processors (A-series
in iPhone and iPad and M-series in Mac). Apple has an ARM architecture license and designs the CPUs
found in its devices from the ground up. Given Apple has a tighter product lineup compared with its
peers, we believe it can design more powerful chips to better handle the demands of iOS and MacOS, in
contrast to chips from Qualcomm or Intel that must address a wider array of devices and operating
systems. Perhaps even more critical to Apple's performance leadership in chip benchmarks is its close
relationship with foundry leader TSMC. Apple's scale enables it to demand dedicated capacity in
TSMC's most advanced fabs while its large chip orders enable TSMC to ramp production of its leading-
edge process technology more economically. For example, Apple's iPhone 15 will be the first device to
feature chips made on TSMC's 3-nanometer process technology in 2023. Apple's chip design efforts
aren't limited to the CPU either, as the firm also designs its own GPU, dedicated AI neural engine chip,
and is attempting to develop its own cellular modem, Bluetooth, and Wi-Fi chips in-house.
Finally, Apple's intangible assets in hardware, software, services, and chip design give us confidence
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that the company is unlikely to be left too far behind if any revolutionary technology were to emerge. In
smartphones, we have often seen innovative features arise in the Android ecosystem before Apple
(foldable screens is a recent example) and we would never bet on a single firm (even one as large as
Apple) being the only firm to come to market with new technologies. Although recent Android
innovations have not led to massive share loss for Apple, we think Apple has seemingly perfected the
fast follower strategy in which others come first-to-market before Apple addresses the weaknesses in
the new technology and comes to market with a superior implementation.
In other types of technologies, others may come to market first, but only once Apple introduces its own
flavor of a product or feature does a market inflect upwards (none of the Mac, iPhone, iPad, Apple
Watch, or AirPods were the first of their kind). We may see this play out in the years ahead in AR/VR
headsets (of which there are many existing products but none that have reached an inflection point of
adoption).
Network effects represent another source of Apple's wide moat. As iOS users gravitate to the App Store
to purchase new applications, the increasing size of Apple's installed base attracts developers to build
new apps for iOS. Apple's integration of hardware and software also supports its developer networks,
as Apple knows that iOS will be loaded on to only a handful of screen sizes or iPhone models, versus the
hundreds of devices and manufacturers that support Android. This leads to a more fragmented Android
ecosystem, which we believe is relatively harder for developers to support. Apple consistently touts
when the majority of its user base is on the latest operating system, which in turn allows developers to
build for the latest version of iOS and know that their apps are optimized for most of Apple's user base.
Although the Google Play store that supports the Android user base also achieves a similar network
effect, we think the iOS user base is more valuable from a developer perspective given this user base
skews to richer consumers (the iPhone unit market share is in the midteens globally but about 50% in
the U.S.), making them more likely to spend money on in-app purchases. According to data from
SensorTower, global consumer spending on mobile games per download was about $6 on iOS versus
$0.70 on Android OS in 2022.
We concede Apple's competitive advantages are not insurmountable, illustrated by the rise and fall of
former mobile device titans such as Nokia, Motorola, and BlackBerry, all of which failed to keep up with
smartphone innovation (though we argue the iPhone has become materially more vital to users than the
preceding mobile devices). The short product cycles for phones and the inability of these firms to
sufficiently innovate left each one struggling after the debut of Apple's iPhone and its subsequent
proliferation. Apple is not immune to these pitfalls, as consumer sentiment for technology gadgets can
be unforgiving, with one buggy or subpar product potentially driving customers to other companies'
offerings, which have been increasingly competitive.
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Based on these three moat sources, we don't foresee Apple's captive user base scaling its walled
garden anytime soon. We believe switching costs from iOS are as strong as ever thanks to more
auxiliary products and services and greater inertia for users, making switching away from iOS more
difficult over time. Regarding intangible assets, Apple's differentiated user experience via iOS coupled
with its expertise in hardware, software, and now semiconductor design allows the firm to build
vertically integrated products more seamlessly. We also see network effects around iOS and its 1 billion-
plus installed base with new app development favoring iOS. Going forward, we expect Apple to better
monetize its captive user base via supplemental products and services that will evolve into a more
robust recurring revenue stream. We see no other technology titan with comparable expertise across
consumer hardware, software, services, and chip design.
In turn, we believe this integration allows Apple to build premium devices that command industry-
leading average selling prices and margins, most notably the firm's crown jewel: the iPhone. Although
Apple's midteens market share in the smartphone space doesn't seem excessive, the firm does enjoy the
lion's share of industry profits (we estimate 25% operating margins for the iPhone versus about 10% for
Samsung's mobile device segment). In an industry where the greatest concern a decade ago was
commoditization of the smartphone, we've actually seen Apple lift its iPhone average selling prices, or
ASPs, in recent years much higher than ASPs within the Android device space.
Fair Value and Profit Drivers Brian Colello, CPA, Sector Director, 25 May 2023
Our fair value estimate is $150 per share. Our estimate implies a fiscal 2023 (ending September 2023)
GAAP price/earnings ratio of 25 times. In fiscal 2023, we expect total revenue to be down 2%, as
services growth and flattish wearable revenue will be offset by modest declines in iPhone and iPad
revenue and a sharp drop in Mac revenue. We view the iPhone, iPad, and Mac revenue declines as
reasonable following multiple strong years associated with work- and learning-from-home trends due to
COVID-19.
By product, we model iPhone revenue growth at a 3% CAGR over the next five years, with such growth
coming off a strong fiscal 2022, again because of a spike in sales during COVID-19. We anticipate low-
single-digit growth in both iPhone unit sales and iPhone average selling prices over our forecast period.
We anticipate flattish CAGRs in both iPad and Mac revenue, again off of a strong base in fiscal 2022.
We expect services to grow at a 6.5% CAGR over the next five years, as iOS users buy more and more of
the firm’s services like Apple TV+, Apple Music, and so on. We model Apple’s wearables, home, and
accessories segment to grow at a 17% CAGR over the next five years. We anticipate strong growth in
watches and airPods in the years ahead, while also anticipating the launch of an AR/VR headset over
the next five years. Our fair value estimate assumes a launch with minimal revenue in fiscal 2024, but
growing to an $11 billion business by fiscal 2027.
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We expect gross margins to remain in the 42%-43% range, thanks to Apple’s exceptional premium
pricing strategy and stable iPhone margins. We anticipate product gross margins tracking in the mid-
30s and services gross margins hovering a little over 70%. Although we think the higher-margin services
segment will grow nicely, we foresee lower-margin other products, such as the Apple Watch, serving as
an offset. However, these other products remain vital to Apple being able to lock in iPhone customers
with the likes of AirPods, Apple Watch, and other accessories that sell at a notable premium to non-
Apple counterparts. The shift to internally designed ARM-based chips in lieu of chips from Intel for
Apple's Mac PCs should help improve Mac margins. To remain king of the hill in the premium
smartphone market, we model higher research and spending as Apple drives innovation and potentially
ventures into new frontiers. We expect operating margins to remain around 30% over our five-year
forecast period.
Risk and Uncertainty Brian Colello, CPA, Sector Director, 25 May 2023
We assign Apple a High Morningstar Uncertainty Rating. As the largest firm in the world, Apple is prone
to material competition. Consumer hardware is inherently prone to cutthroat competition as short-
product cycles and customers hungry for ever superior features make market leadership difficult to
maintain. Although Apple has done well with its walled garden approach, the firm competes with
Chinese OEMs and Samsung across all tiers.
We also suspect that many customers are holding on to their phones longer than before, as premium
devices are more than good enough for today’s needs (web browsing, streaming, social media).
Analogous to the decline of PCs, Apple faces the possibility of smartphone unit stagnation or even
declines once emerging markets saturate or consumers gravitate to mid-tier devices. Should it be
unable to innovate, Apple may lose its ability to charge premium prices for hardware that is no longer
unique relative to devices from competitors.
Some peers are willing to sell hardware at essentially cost to drive market share and stickiness in other
business segments. A notable example is Amazon with its Echo smart speaker, Fire TV, Prime Music,
and Prime Video to attract and retain Prime customers. Should these devices supersede their iOS
counterparts, Apple's devices may be at risk. A recent focus on AI assistants such as Google Assistant
and Amazon Alexa has also put pressure on Apple’s Siri that has fallen behind its peers in efficacy.
On the environmental, social, and governance front, the biggest issue we see for Apple is its app store
commission structure that is facing legal and regulatory scrutiny as Apple is accused of using tactics
that hurt competition. Apple’s service revenue could be negatively impacted if any antitrust rulings go
against it.
Capital Allocation Brian Colello, CPA, Sector Director, 25 May 2023
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We assign Apple an Exemplary capital allocation rating. The rating reflects our assessments of a sound
balance sheet, exceptional investments associated with the firm’s strategy and execution, and
appropriate shareholder distribution policies.
Apple has a relatively strong balance sheet, in our view, with $166.3 billion in gross cash, equivalents,
and investments, as compared with $109.6 billion of debt as of March 2023. We think the firm
generates sufficient cash flow and has ample resources to meet its debt obligations, capital expenditure
requirements, potential acquisitions, and shareholder returns. In terms of shareholder distribution
policies, we applaud Cook's decision to initiate dividend and stock buyback programs as well as take on
debt in order to fund such programs when most of its cash was trapped overseas. Apple continues to
strive to achieve a net cash neutral position over time.
We think Apple’s recent level of technological innovation has been adequate, though it has likely faced
an unreasonably high bar for expectations after the debut of the iPhone. Many of the firm’s recent
innovations have been in software and services within iOS, such as Apple Pay, as well as under-the-
hood improvements in semiconductors, rather than revolutionary devices like the iPod or the iPhone. We
like how the firm designs its own chips for the CPU and artificial intelligence (A-series bionic neural
engine), as this can create a better user experience since Apple also designs the operating system and
can appropriately tailor the CPU or neural engine to its needs. Going forward, we expect the firm to also
design its own GPU and 5G modem, which should enable performance differentiation. Apple has
focused on tuck-in acquisitions that have aided its R&D efforts over the years. Although the company
has the balance sheet strength to conduct significant M&A in the years ahead, we suspect that Apple
will stick with its strategy of (mostly) building, rather than buying, technological expertise.
Analyst Notes Archive
Apple Earnings: Hardware Headwinds Look Ominous; Shares Overvalued Versus $150 Fair Value
Estimate Abhinav Davuluri, CFA, Strategist, 5 May 2023
Apple's fiscal second-quarter results surpassed our estimates, thanks to outperformance in iPhone and
services revenue. We had been anticipating a slowdown in the firm’s hardware products following
several years of strong growth related to COVID-19-induced work- and learning-from home trends, as
well as the initial rollout of 5G. Although most segments fell on a year-over-year basis, we were pleased
to see the iPhone and services units exhibited modest growth. We remain cautious of the next several
quarters for the firm as macroeconomic headwinds persist, though we concede that wide-moat Apple
will fare better than many of its smartphone peers. Our fair value estimate remains $150 per share, and
shares appear overvalued at current levels.
March-quarter revenue of $95 billion fell 3% year over year with declines in iPad (13%), Mac (31%), and
wearables (1%). Mac and iPad faced product launch timing differences as well as weaker demand.
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Positively, iPhone revenue grew 2% year over year to $51 billion, thanks to strength in emerging
markets, such as India, and what we assume to be higher average selling prices. Given the iPhone 14
Pro has a superior camera and processor relative to the base iPhone 14 model, we think a richer mix will
help offset unit declines in the near term. Services revenue rose 6% year over year to $21 billion with
strength in App Store, Apple Music, iCloud, and Apple Pay. Apple now enjoys over 975 million paid
subscribers (up from 935 million last quarter), which we think bodes well for continued services growth
as the firm increasingly monetizes its valuable installed base. Management noted quarterly sales would
have been up in constant currency (500 basis points in foreign exchange headwinds). Gross margins
rose 130 basis points sequentially to 44%, thanks to a more favorable product mix. With hardware sales
poised to weaken while services revenue stays resilient, we think Apple’s gross margins will stay above
44% for the rest of fiscal 2023.
We See a Tenuous 2023 for Apple as Headwinds Mount; Shares Fairly Valued, FVE Remains $150
Abhinav Davuluri, CFA, Strategist, 3 Feb 2023
Apple reported weaker fiscal first-quarter results that fell short of our estimates due to a combination of
supply shortages for its iPhone 14 Pro models, macroeconomic challenges, and foreign exchange
headwinds. We have been anticipating a slowdown in the firm’s hardware products following several
years of strong growth related to COVID-19-induced work- and learning-from home trends as well as the
initial rollout of 5G. Shares fell modestly during after-hours trading and are relatively in line with our
unchanged fair value estimate of $150 per share. Although we remain positive on wide-moat Apple’s
iOS walled garden, we expect the upcoming quarters to be challenging and thus recommend
prospective investors wait for a wider margin of safety.
December-quarter revenue of $117 billion was down 5% year over year with declines in iPhone (down
8%), Mac (down 29%), and wearables (down 8%), partially offset by growth in iPad (30%) and services
(6%). Apple now enjoys over 935 million paid subscribers (up from 900 million last quarter), which we
think bodes well for continued services growth as the firm increasingly monetizes its valuable installed
base. Management noted quarterly sales would have been up in constant currency—800 basis points in
currency headwinds—but we think these currency headwinds will subside. Gross margins rose 70 basis
points sequentially to 43%, thanks to seasonal leverage. With hardware sales poised to weaken while
services revenue stays resilient, we think Apple’s gross margins will remain above 43% for the rest of
fiscal 2023.
Management refrained from giving explicit revenue guidance for the March quarter due to
macroeconomic uncertainty but expects a year-over-year decline in sales like the 5% decline in the
December quarter. We believe iPhone revenue will be down another 9%, as improved supply conditions
in China for the iPhone 14 Pro models won’t be enough to combat overall weaker smartphone demand,
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TM TM
30 Jun 2023 7 Jun 2023 05:00, UTC
30 Jun 2023 20 Jan 2023 17:37, UTC
in our view.
Apple’s Walled Garden Warrants a Wide Economic Moat; Raising Fair Value Estimate to $150
Abhinav Davuluri, CFA, Strategist, 20 Jan 2023
We are upgrading our economic moat rating for Apple to wide from narrow, as we have greater
confidence in the firm’s competitive advantages stemming from high customer switching costs,
intangible assets, and network effects associated with its iOS ecosystem. We believe switching costs
from iOS are as strong as ever thanks to more auxiliary products and services that make switching away
from iOS more difficult over time. Regarding intangible assets, Apple’s differentiated user experience via
iOS coupled with its expertise in hardware, software, and now semiconductor design allows the firm to
build vertically integrated products more seamlessly. We also see network effects around iOS and its 1
billion-plus installed base with new app development favoring iOS.
We are raising our fair value estimate to $150 per share from $130 per share, as we expect the firm to
earn excess returns on invested capital over a longer time horizon consistent with our wide-moat rating.
While shares are modestly undervalued relative to our updated fair value, we expect the upcoming
quarters to be challenging for Apple from both demand and supply perspectives. Consequently, we
recommend prospective investors wait for a wider margin of safety.
Going forward, we expect Apple to better monetize its captive user base via supplemental products and
services that will evolve into a more robust recurring revenue stream. We see no other technology titan
with comparable expertise across consumer hardware, software, services, and chip design. In turn, we
believe this integration allows Apple to build premium devices that command industry-leading average
selling prices and margins—most notably the firm’s crown jewel, the iPhone.
Despite Strong Q4, Apple Is Not Immune to Macro and Foreign-Exchange Headwinds; Maintaining
$130 FVE Abhinav Davuluri, CFA, Strategist, 28 Oct 2022
Narrow-moat Apple reported impressive fiscal fourth-quarter results that came ahead of our estimates
thanks to iPhone and Mac strength. We are maintaining our $130 fair value estimate and still view the
shares as overvalued. While we remain positive on Apple's ability to extract revenue and robust profits
from its installed base via new products and services, we believe demand for the company's products is
likely to slow in the next few quarters following several stellar quarters of growth.
September-quarter revenue of $90 billion was up 8% year over year led by growth in iPhone (10%), Mac
(25%), other products (10%), and services (5%). We appreciate that Apple now enjoys over 900 million
paid subscribers (up from 860 million last quarter). The iPad segment fell 13% year over year, which we
anticipated due to unmaintainable COVID-19-induced work- and learn-from-home trends that boosted
tablet demand.
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TM TM
30 Jun 2023 7 Jun 2023 05:00, UTC
30 Jun 2023 20 Jan 2023 17:37, UTC
Management refrained from giving explicit revenue guidance for the December quarter due to macro
uncertainty, but we expect low-single-digit year-over-year growth. We think the iPhone segment will
lead the way with growth of about 10%, partially offset by year-over-year declines in Mac and iPad. We
think broader hardware sales for the firm are likely to slow and/or decline in the quarters ahead as
consumers deal with currency headwinds, high inflation, and more challenging year-over-year
comparisons. Services revenue should also see weaker demand for gaming and digital advertising amid
a weaker macro environment.
We See Modest iPhone 14 Upgrades Leading to Modest iPhone Growth in Fiscal 2023; Shares
Overvalued Abhinav Davuluri, CFA, Strategist, 7 Sep 2022
On Sept. 7, Apple held its annual product showcase, where the firm announced the launch of new
iPhones, Apple Watches, and AirPods. Apple launched four new iPhone models: the iPhone 14 ($799),
iPhone 14 Plus ($899), iPhone 14 Pro ($999), and iPhone 14 Pro Max ($1,099), with pricing unexpectedly
consistent with equivalent models from the prior year. We had expected some price increases given
recent inflationary pressures, but we think Apple was able to hold prices steady by reusing the same
A15 Bionic processor in the base iPhone 14 model as the iPhone 13, while only the iPhone 14 Pro
received the latest A16 Bionic processor. Consequently, we think the firm's product gross margins
should remain relatively steady in the mid-30% range. Beyond the typical chip, battery, and camera
enhancements, we equate many of the updates to those of past iPhone "S" models that were more
incremental in nature. While 5G penetration still has room to grow, we think Apple's fiscal 2023 iPhone
growth is likely to be more muted than the growth implied by the current stock price. We are
maintaining our $130 fair value estimate for narrow-moat Apple and see shares as overvalued.
Despite softer smartphone demand (especially in China), Apple's recent iPhone results have proven
more resilient. However, with recessionary fears, inflationary pressures, and the relatively incremental
nature of the iPhone 14 versus the iPhone 13, we expect Apple's fiscal 2023 revenue to be up only 3%
year over year to nearly $212 billion.
Battery life continued to expand, although the iPhone 14 Pro with the A16 chip will enjoy more of the
uplift as this chip is manufactured on TSMC's 4-nanometer process technology (versus the A15 made on
the 5-nm process). Apple also swapped the mini variant from the iPhone 13 (5.4-inches) with a "plus"
iPhone 14 variant that is 6.7-inches. The Pro once again has three cameras (ultrawide, wide, and
telephoto), with base and plus models having dual-camera setups.
Apple Deftly Navigates Challenging Supply Environment in Fiscal Q3 but Headwinds Loom; Keep
$130 FVE Abhinav Davuluri, CFA, Strategist, 29 Jul 2022
Narrow-moat Apple reported healthy fiscal third-quarter results that came in line with our estimates.
We are maintaining our $130 fair value estimate and still view shares as overvalued. While we remain
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TM TM
30 Jun 2023 7 Jun 2023 05:00, UTC
30 Jun 2023 20 Jan 2023 17:37, UTC
positive on Apple's ability to extract sales from its installed base via new products and services, we
believe demand for Apple’s products is likely to slow in the next few quarters, following several stellar
quarters of growth.
Third-quarter sales of $83 billion were up 2% year over year thanks to growth in iPhone (3%) and
services (12%). The Mac and iPad segments fell 10% and 2% year over year, respectively, which we
anticipated due to unsustainable COVID-19-induced work- and learn-from-home trends that boosted PC
and tablet demand. Gross margin of 43.3% was down 40 basis points sequentially due to a seasonal loss
of leverage and foreign exchange headwinds, partially offset by a more favorable mix.
Management refrained from giving explicit revenue guidance for the September quarter due to
macroeconomic uncertainty, but we expect low-single-digit year-over-year growth led by the iPhone and
services segments. We’re impressed that Apple now enjoys over 860 million paid subscribers (up from
825 million last quarter). Despite broader weakness in the smartphone industry, we expect Apple’s
upcoming iPhone 14 will enjoy strong demand in China, following multiple months of COVID-19
lockdowns in China that hampered consumer spending. However, we think broader hardware sales for
the firm are likely to slow as consumers deal with inflation and a potential recession.
Supply constraints for the September quarter are expected to be lower than those experienced during
the June quarter, though we suspect macroeconomic headwinds (inflationary pressures and
recessionary fears) are likely curbing demand for Apple’s hardware products. The firm is also facing
foreign exchange headwinds, which are expected to negatively affect September quarter sales by 600
basis points. K
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Competitors Price vs. Fair Value
Alphabet Inc Class A GOOGL
Fair Value: 154.00

3 Feb 2023 10:57, UTC
200
Last Close: 119.70
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.80 1.03 0.89 0.83 0.55 0.78 Price/Fair Value
-0.80 28.18 30.85 65.30 -39.09 35.67 Total Return %
Morningstar Rating
Total Return % as of 30 Jun 2023. Last Close as of 30 Jun 2023. Fair Value as of 3 Feb 2023 10:57, UTC.
HP Inc HPQ
Last Close: 30.71

7 Nov 2022 15:52, UTC
30 Over Valued
Under Valued
20
10
0
2018 2019 2020 2021 2022 YTD
0.82 1.08 1.23 1.30 0.90 1.02 Price/Fair Value
0.13 3.65 23.17 56.57 -25.98 16.24 Total Return %
Morningstar Rating
Total Return % as of 30 Jun 2023. Last Close as of 30 Jun 2023. Fair Value as of 7 Nov 2022 15:52, UTC.
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Microsoft Corp MSFT
Last Close: 340.54

26 Apr 2023 04:03, UTC
300 Over Valued

Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD
0.78 1.02 0.95 0.97 0.75 1.05 Price/Fair Value
20.75 57.12 42.37 52.24 -27.94 42.57 Total Return %
Morningstar Rating
Total Return % as of 30 Jun 2023. Last Close as of 30 Jun 2023. Fair Value as of 26 Apr 2023 04:03, UTC.
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TM TM
30 Jun 2023 7 Jun 2023 05:00, UTC
30 Jun 2023 20 Jan 2023 17:37, UTC
Morningstar Historical Summary

Financials as of 31 Mar 2023
Fiscal Year, ends 30 Sep 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (USD Bil) 171 183 234 216 229 266 260 275 366 394 212 385
Revenue Growth % 9.2 7.0 27.9 -7.7 6.3 15.9 -2.0 5.5 33.3 7.8 -4.2 -0.2
EBITDA (USD Bil) 57 62 85 73 77 87 82 81 123 133 72 127
EBITDA Margin % 33.4 33.8 36.2 34.0 33.4 32.8 31.5 29.5 33.7 33.8 33.9 32.9
Operating Income (USD Bil) 49 53 71 60 61 71 64 66 109 119 64 112
Operating Margin % 28.7 28.7 30.5 27.8 26.8 26.7 24.6 24.2 29.8 30.3 30.3 29.2
Net Income (USD Bil) 37 40 53 46 48 60 55 57 95 100 54 94
Net Margin % 21.7 21.6 22.9 21.2 21.1 22.4 21.2 20.9 25.9 25.3 25.6 24.5
Diluted Shares Outstanding (Bil) 26 24 23 22 21 20 19 18 17 16 16 16
Diluted Earnings Per Share (USD) 1.42 1.61 2.31 2.08 2.30 2.98 2.97 3.28 5.61 6.11 3.41 5.90
Dividends Per Share (USD) 0.41 0.45 0.50 0.55 0.60 0.68 0.75 0.80 0.85 0.90 0.46 0.92
Valuation as of 30 Jun 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales 3.1 3.7 2.6 3.0 3.9 3.0 5.2 8.5 8.2 5.4 8.1 8.1
Price/Earnings 14.1 17.1 11.4 13.9 18.4 13.2 24.7 40.5 31.6 21.3 32.9 32.9
Price/Cash Flow 9.7 11.3 7.5 9.7 14.0 10.2 19.7 28.8 28.8 17.4 28.4 28.4
Dividend Yield % 2.1 1.67 1.93 1.93 1.45 1.79 1.04 0.61 0.49 0.7 0.48 0.48
Price/Book 4.1 5.8 4.9 4.7 6.4 7.0 14.2 34.1 46.1 40.7 49.0 49.0
EV/EBITDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Operating Performance / Profitability as of 31 Mar 2023
Fiscal Year, ends 30 Sep 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 19.3 18.0 20.5 14.9 13.9 16.1 15.7 17.3 28.1 28.4 15.8 27.6
ROE % 30.6 33.6 46.3 36.9 36.9 49.4 55.9 73.7 147 175 96.0 145.6
ROIC % 26.1 26.2 31.3 22.0 19.9 24.4 25.8 30.1 51.7 55.7 31.7 52.6
Asset Turnover 0.9 0.8 0.9 0.7 0.7 0.7 0.7 0.8 1.1 1.1 0.6 1.1
Financial Leverage
Fiscal Year, ends 30 Sep 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % 12.1 20.6 30.9 37.0 42.0 46.7 50.4 60.2 63.4 66.1 61.0 —
Equity/Assets % 59.7 48.1 41.1 39.9 35.7 29.3 26.7 20.2 18.0 14.4 18.7 —
Total Debt/EBITDA 0.3 0.6 0.8 1.2 1.5 1.3 1.3 1.4 1.0 0.9 1.5 —
EBITDA/Interest Expense 419.4 161.0 115.3 50.4 33.0 26.9 22.9 28.2 46.5 45.4 37.1 36.4
Morningstar Analyst Historical/Forecast Summary as of 24 May 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 09-26-2022 2021 2022 2023 2024 2025
Price/Sales 6.4 5.6 7.9 7.4 6.9
Revenue (USD Mil) 365,817 394,328 385,935 411,591 444,532 Price/Earnings 25.2 22.6 31.0 28.5 25.3
Revenue Growth % 33.3 7.8 -2.1 6.7 8.0 Price/Cash Flow 25.0 19.8 29.1 26.5 24.5
EBITDA (USD Mil) 120,233 130,541 127,050 133,303 145,003 Dividend Yield % 0.6 0.7 0.5 0.5 0.6
EBITDA Margin % 32.9 33.1 32.9 32.4 32.6 Price/Book 37.8 44.6 42.1 38.5 34.7
EV/EBITDA 19.8 17.4 24.4 23.3 21.4
Operating Income (USD Mil) 108,949 119,437 115,472 120,955 131,668
Operating Margin % 29.8 30.3 29.9 29.4 29.6
Net Income (USD Mil) 94,680 99,803 97,798 102,809 112,101
Net Margin % 25.9 25.3 25.3 25.0 25.2
Diluted Shares Outstanding (Bil) 17 16 16 15 15
Diluted Earnings Per Share(USD) 5.61 6.11 6.25 6.79 7.66
Dividends Per Share(USD) 0.85 0.90 0.94 1.00 1.08
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Appendix
Historical Morningstar Rating
Apple Inc AAPL 30 Jun 2023 21:16, UTC
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
- - - - - QQ QQ QQ QQQ QQQ QQQ QQQ
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Alphabet Inc Class A GOOGL 30 Jun 2023 21:16, UTC
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HP Inc HPQ 30 Jun 2023 21:16, UTC
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Microsoft Corp MSFT 30 Jun 2023 21:16, UTC
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QQQQ QQQQ QQQQ QQQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
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QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ
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Overview timate of a firm’s cost of capital, or weighted average In this stage, which can last five to 10 years, analysts
At the heart of our valuation system is a detailed projec- cost of capital (or WACC). Without a moat, profits are make full financial statement forecasts, including items
tion of a company’s future cash flows, resulting from our more susceptible to competition. We have identified five such as revenue, profit margins, tax rates, changes in
analysts’ research. Analysts create custom industry and sources of economic moats: intangible assets, switching workingcapital accounts, and capital spending. Based on
company assumptions to feed income statement, balance costs, network effect, cost advantage, and efficient scale. these projections, we calculate earnings before interest,
sheet, and capital investment assumptions into our glob- after taxes (EBI) and the net new investment (NNI) to de-
ally standardized, proprietary discounted cash flow, or Companies with a narrow moat are those we believe are rive our annual free cash flow forecast.
DCF, modeling templates. We use scenario analysis, inde- more likely than not to achieve normalized excess returns
for at least the next 10 years. Wide-moat companies are Stage II: Fade
pth competitive advantage analysis, and a variety of other
those in which we have very high confidence that excess The second stage of our model is the period it will take
analytical tools to augment this process. Moreover, we
returns will remain for 10 years, with excess returns more the company’s return on new invested capital—the re-
think analyzing valuation through discounted cash flows
likely than not to remain for at least 20 years. The longer turn on capital of the next dollar invested (“RONIC”)—to
presents a better lens for viewing cyclical companies,
a firm generates economic profits, the higher its intrinsic decline (or rise) to its cost of capital. During the Stage II
high-growth firms, businesses with finite lives (e.g.,
value. We believe low-quality, no-moat companies will period, we use a formula to approximate cash flows in
mines), or companies expected to generate negative
see their normalized returns gravitate toward the firm’s lieu of explicitly modeling the income statement, balance
earnings over the next few years. That said, we don’t dis-
cost of capital more quickly than companies with moats. sheet, and cash flow statement as we do in Stage I. The
miss multiples altogether but rather use them as support-
length of the second stage depends on the strength of
ing cross-checks for our DCF-based fair value estimates.
When considering a company's moat, we also assess the company’s economic moat. We forecast this period to
We also acknowledge that DCF models offer their own
whether there is a substantial threat of value destruction, last anywhere from one year (for companies with no eco-
challenges (including a potential proliferation of estim-
stemming from risks related to ESG, industry disruption, nomic moat) to 10–15 years or more (for wide-moat com-
ated inputs and the possibility that the method may miss
financial health, or other idiosyncratic issues. In this con- panies). During this period, cash flows are forecast using
shortterm market-price movements), but we believe these
text, a risk is considered potentially value destructive if its four assumptions: an average growth rate for EBI over the
negatives are mitigated by deep analysis and our
occurrence would eliminate a firm’s economic profit on a period, a normalized investment rate, average return on
longterm approach.
cumulative or midcycle basis. If we deem the probability new invested capital (RONIC), and the number of years
of occurrence sufficiently high, we would not characterize until perpetuity, when excess returns cease. The invest-
Morningstar’s equity research group (”we,” “our”) be-
the company as possessing an economic moat. ment rate and return on new invested capital decline un-
lieves that a company’s intrinsic worth results from the
til a perpetuity value is calculated. In the case of firms
future cash flows it can generate. The Morningstar Rating
To assess the sustainability of excess profits, analysts per- that do not earn their cost of capital, we assume marginal
for stocks identifies stocks trading at a discount or premi-
form ongoing assessments of the moat trend. A firm’s ROICs rise to the firm’s cost of capital (usually attribut-
um to their intrinsic worth—or fair value estimate, in
moat trend is positive in cases where we think its sources able to less reinvestment), and we may truncate the
Morningstar terminology. Five-star stocks sell for the
of competitive advantage are growing stronger; stable second stage.
biggest risk adjusted discount to their fair values, where-
as 1-star stocks trade at premiums to their intrinsic worth. where we don’t anticipate changes to competitive ad-
vantages over the next several years; or negative when Stage III: Perpetuity
Four key components drive the Morningstar rating: (1) our we see signs of deterioration. Once a company’s marginal ROIC hits its cost of capital,
assessment of the firm’s economic moat, (2) our estimate we calculate a continuing value, using a standard per-
of the stock’s fair value, (3) our uncertainty around that 2. Estimated Fair Value petuity formula. At perpetuity, we assume that any
fair value estimate and (4) the current market price. This Combining our analysts’ financial forecasts with the growth or decline or investment in the business neither
process ultimately culminates in our singlepoint star rat- firm’s economic moat helps us assess how long returns creates nor destroys value and that any new investment
ing. on invested capital are likely to exceed the firm’s cost of provides a return in line with estimated WACC.
capital. Returns of firms with a wide economic moat rat-
ing are assumed to fade to the perpetuity period over a Because a dollar earned today is worth more than a dollar
1. Economic Moat
longer period of time than the returns of narrow-moat earned tomorrow, we discount our projections of cash
The concept of an economic moat plays a vital role not
firms, and both will fade slower than no-moat firms, in- flows in stages I, II, and III to arrive at a total present
only in our qualitative assessment of a firm’s long-term
creasing our estimate of their intrinsic value. value of expected future cash flows. Because we are
investment potential, but also in the actual calculation of
modeling free cash flow to the firm—representing cash
our fair value estimates. An economic moat is a structural
Our model is divided into three distinct stages: available to provide a return to all capital providers—we
feature that allows a firm to sustain excess profits over a
discount future cash flows using the WACC, which is a
long period of time. We define economic profits as re-
weighted average of the costs of equity, debt, and pre-
turns on invested capital (or ROIC) over and above our es- Stage I: Explicit Forecast
ferred stock (and any other funding sources), using ex-
Morningstar Equity Research Star Rating Methodology pected future proportionate long-term, market-value
weights.
3. Uncertainty Around That Fair Value Estimate

Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company’s intrinsic
value. 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
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aimed at identifying the confidence we should have in as- Morningstar Equity Research Star Rating Methodology
signing a fair value estimate for a given stock.
Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
thing that can affect our ability to accurately predict
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain factors.
we are about the potential dispersion of outcomes, the For more details about our methodology, please go to
greater the discount we require relative to our estimate of https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be-
the value of the firm before we would recommend the low:
purchase of the shares. In addition, the Uncertainty Rat- Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk ad-
ing provides guidance in portfolio construction based on justed return is highly likely over a multiyear time frame.
Once we determine the fair value estimate of a stock, we
risk tolerance. Scenario analysis developed by our analysts indicates
compare it with the stock’s current market price on a
daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
Our Uncertainty Ratings are: Low, Medium, High, Very
lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
High, and Extreme.
which the stock is listed is open. Our analysts keep close ing upside potential.
tabs on the companies they follow, and, based on thor-
Margin of Safety
ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Qualitative Analysis
QRating estimates as warranted. justed return is likely.
Uncertainty Ratings QQQQQRating
Low 20% Discount 25% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
Medium 30% Discount 35% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
High 40% Discount 55% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Very High 50% Discount 75% Premium
serve as a gauge of the broader market’s valuation. When
Extreme 75% Discount 300% Premium QQ We believe investors are likely to receive a less than
there are many 5-star stocks, the stock market as a whole
is more undervalued, in our opinion, than when very few fair risk-adjusted return.
Our uncertainty rating is based on the interquartile range,
companies garner our highest rating.
or the middle 50% of potential outcomes, covering the Q Indicates a high probability of undesirable risk-adjus-
25th percentile–75th percentile. This means that when a ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
stock hits 5 stars, we expect there is a 75% chance that time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
the intrinsic value of that stock lies above the current our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
market price. Similarly, when a stock hits 1 star, we excessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
pect there is a 75% chance that the intrinsic value of that leaving the investor exposed to Capital loss.
prices may adjust).
stock lies below the current market price.
Our star ratings are guideposts to a broad audience and Other Definitions
4. Market Price individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
The market prices used in this analysis and noted in the goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
report come from exchange on which the stock is listed needs, and complete investment portfolio, among other
which we believe is a reliable source.
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Capital Allocation Rating: Our Capital Allocation (or Sustainalytics analyzes over 1,300 data points to assess a situation or particular needs of any specific recipient. This
Stewardship) Rating represents our assessment of the company’s exposure to and management of ESG risks. In publication is intended to provide information to assist in-
quality of management’s capital allocation, with particu- other words, ESG Risk Ratings measures a company’s un- stitutional investors in making their own investment de-
lar emphasis on the firm’s balance sheet, investments, managed ESG Risks represented as a quantitative score. cisions, not to provide investment advice to any specific
and shareholder distributions. Analysts consider compan- Unmanaged Risk is measured on an open-ended scale investor. Therefore, investments discussed and recom-
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing mendations made herein may not be suitable for all in-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- vestors: recipients must exercise their own independent
Corporate governance factors are only considered if they aged ESG Risk score is below 50. judgment as to the suitability of such investments and re-
are likely to materially impact shareholder value, though commendations in the light of their own investment ob-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are jectives, experience, taxation status and financial posi-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, tion.
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute,
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- The information, data, analyses and opinions presented
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- herein are not warranted to be accurate, correct, com-
Standard rating is most common as most managers will tries covered. plete or timely. Unless otherwise provided in a separate
exhibit neither exceptionally strong nor poor capital alloc- agreement, neither Morningstar, Inc. or the Equity Re-
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Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low able in the jurisdiction the recipient is located.
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes,
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit Except as otherwise required by law or provided for in a
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or to Dec. 9, 2020, was determined using a different pro- value price. Where this report is made available in a language other
cess. Beyond investment strategy, financial leverage, and than English and in the case of inconsistencies between
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Unless otherwise provided in a separate agreement, re-
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Sustainalytics ESG Risk Rating Assessment:The ESG Morningstar, Inc., or the Equity Research Group guaran-
try in which the Morningstar distributor is based. Unless
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regard to the specific investment objectives, financial
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Morningstar Equity Analyst Report | Report as of 1 Jul 2023 05:49, UTC | Reporting Currency: USD | Trading Currency: USD

| Exchange: NASDAQ - ALL MARKETS Page 1 of 22

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Price vs. Fair Value

Last Close: 193.97

150 Over Valued

The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Bulls Say Brian Colello, CPA, Sector Director, 25 May 2023

Bears Say Brian Colello, CPA, Sector Director, 25 May 2023

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Economic Moat Wide Wide None Wide

reputation for building products that "just work."

Economic Moat Brian Colello, CPA, Sector Director, 25 May 2023

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Capital Allocation Brian Colello, CPA, Sector Director, 25 May 2023

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Analyst Notes Archive

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Competitors Price vs. Fair Value

Alphabet Inc Class A GOOGL

Fair Value: 154.00

Last Close: 30.71

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Microsoft Corp MSFT

Last Close: 340.54

300 Over Valued

Apple Inc AAPL QQ 30 Jun 2023 21:16, UTC

Morningstar Historical Summary

Valuation as of 30 Jun 2023

Morningstar Analyst Historical/Forecast Summary as of 24 May 2023

Alphabet Inc Class A GOOGL 30 Jun 2023 21:16, UTC

HP Inc HPQ 30 Jun 2023 21:16, UTC

Microsoft Corp MSFT 30 Jun 2023 21:16, UTC

Research Methodology for Valuing Companies

3. Uncertainty Around That Fair Value Estimate

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Our recommended margin of safety—the discount to fair

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

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