Strong refresh cycle drives results

The results highlighted the strength of the current refresh cycle. Morningstar said iPhone revenue grew 23% year over year, roughly 10 percentage points above its prior model, as pent-up demand drove upgrades. “We believe Apple is benefiting from a strong refresh cycle in 2026, driven by pent-up customer demand,” Kerwin says, adding that the momentum should carry into the March quarter based on company guidance.

Morningstar now expects iPhone revenue growth in the low teens in 2026, up from high single digits. Over the long term, however, the firm continues to model mid-single-digit growth as smartphone innovation becomes more incremental. “Phone advancements have become more evolutionary,” Kerwin says. “The average user is able to hold onto an existing device longer.”

China shows a surprise rebound

China, long viewed as a structural headwind for Apple, delivered a rare upside surprise in the quarter. Apple reported 38% year-over-year revenue growth there, marking a sharp reversal after two years of underperformance.

“We still see longer-term headwinds to Apple’s China growth,” Kerwin says, referring to geopolitical tensions and stronger domestic competitors. “But this quarter shows the firm’s ability to compete and win against beefed-up domestic competition.”

He cautions, though, that the pace of growth is unlikely to be sustained. “China did very well this quarter, and I think there’s very low chance that that type of growth repeats,” he says, adding that future performance will likely normalize closer to trends seen in other developed markets.

Margins continue to impress

Profitability was another key driver behind Morningstar’s valuation increase. Apple posted more than 100 basis points of gross margin expansion, despite ongoing headwinds from tariffs and rising memory prices. “Apple’s relentless gross margin expansion, despite tariffs and skyrocketing memory chip prices, is raising our expectations,” Kerwin says.

Morningstar now projects Apple will reach a 50% gross margin within two years, up from 38% in 2020, as higher-margin services make up a larger share of sales and Apple continues designing more of its own chips, helping lower hardware costs and reduce reliance on outside suppliers. “They’re still dealing with tariffs and rising memory prices, and yet they continue to set profitability records,” Kerwin says. “That’s one of the really bright areas for confidence.”

AI strategy reinforces the moat

Apple’s artificial intelligence strategy remains a focus for investors, particularly after the company confirmed that its next-generation Apple Intelligence features and revamped Siri assistant will be built on Google’s Gemini models.

Kerwin says that partnering rather than building frontier AI models internally was the right strategic choice. “There’s this generative AI arms race between Google and OpenAI, Anthropic, and everyone else,” he says. “For Apple to try to compete, they’d be fighting a losing battle, and they’d need to spend considerably.”

By anchoring Gemini within its own ecosystem and running models through Apple-controlled infrastructure, the company preserves its privacy-focused value proposition. “They want to run as much of these models physically on device… or through an Apple-operated cloud,” Kerwin explains. While the AI partnership should improve Apple’s competitive positioning, Kerwin says investors are unlikely to re-rate the stock until new features visibly improve the user experience.

Supply constraints loom but appear manageable

One emerging risk is Apple’s ability to meet demand. Supply constraints—particularly competition for chip production capacity at TSMC—are limiting output for products such as iPhone and AirPods. “We expect limited supply to endure through the year,” Kerwin says, “but to have a low impact on results.”

Bottom line

Morningstar analysts see Apple as one of the strongest franchises in global technology, supported by a wide economic moat, robust cash flows, and improving profitability. However, they do not view the stock as a long-term growth play. “It’s quality at the right price,” Kerwin says. “Apple is here for the long haul, but I wouldn’t necessarily characterize it as a growth company.”

After the post-earnings rally, we view Apple shares as fairly valued, suggesting investors may want to wait for a more attractive entry point.