Apple Remains One of Our Best Ideas in Tech as Innovation Lives On; Maintaining $140 Fair Value

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

A pillar of our investment thesis on Apple is that customer switching costs will allow the firm to retain most of its iPhone user base and make repeat sales of premium-priced iPhones to these customers over time. In this context, we believe an over-the-top, or OTT, television service presents an especially promising opportunity to create stickiness in the long run. For years, Apple's OTT efforts have been roadblocked by media content providers. Media firms and traditional television distributors appear to have the inside track to launch OTT services in the near term. Nonetheless, we foresee an Apple OTT television service arriving someday (our best bet is fall 2017). When it does, we struggle to see how the service can directly add to Apple's bottom line. Far more important, however, we expect the service to enhance the iOS ecosystem lock-in, which should enable Apple to sell more iPhones over time. While not first to market, Apple OTT television could be inherently different from others, thanks to smartphone incumbency and integration, the ability to bundle television with other services, and perhaps most important, the chance to own original content.Apple remains on our Best Ideas list because we think the market has dismissed the stickiness of the iOS ecosystem. On the media side, we continue to prefer wide-moat firms like <a href="https://www.smartkarma.com/entities/15439" target="_blank" data-smartkarma-citation="entities:15439:1">The Walt Disney Co (DIS US)</a> (also a Best Idea) and <a href="https://www.smartkarma.com/entities/7746" target="_blank" data-smartkarma-citation="entities:7746:1">Twenty First Century Fox Inc (FOX US)</a> because both firms have the ability to sustain their oats in the face of the ongoing changes across the pay-television landscape.Analyst: Brian Colello &amp; team

A pillar of our investment thesis on Apple is that customer switching costs will allow the firm to retain most of its iPhone user base and make repeat sales of premium-priced iPhones to these customers over time. In this context, we believe an over-the-top, or OTT, television service presents an especially promising opportunity to create stickiness in the long run. For years, Apple's OTT efforts have been roadblocked by media content providers. Media firms and traditional television distributors appear to have the inside track to launch OTT services in the near term. Nonetheless, we foresee an Apple OTT television service arriving someday (our best bet is fall 2017). When it does, we struggle to see how the service can directly add to Apple's bottom line. Far more important, however, we expect the service to enhance the iOS ecosystem lock-in, which should enable Apple to sell more iPhones over time. While not first to market, Apple OTT television could be inherently different from others, thanks to smartphone incumbency and integration, the ability to bundle television with other services, and perhaps most important, the chance to own original content.Apple remains on our Best Ideas list because we think the market has dismissed the stickiness of the iOS ecosystem. On the media side, we continue to prefer wide-moat firms like The Walt Disney Co (DIS US) (also a Best Idea) and Twenty First Century Fox Inc (FOX US) because both firms have the ability to sustain their oats in the face of the ongoing changes across the pay-television landscape.Analyst: Brian Colello &amp; team

An Apple Over-The-Top Television Service Would Be a Win-Win For Both Apple and Media Providers