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Apple Inc. (AAPL) Looks To Increase The Value Of Its Ecosystem

Apple Inc. (AAPL) is taking steps for future growth, both in capital expenditures and initiatives to increase the value of its ecosystem. Morgan Stanley (MS) analysts Katy Huberty, Jerry Liu and Scott Schmitz believe the company is moving in the right direction.


Reflecting on a meeting with Apple management

They met with Apple Inc. (AAPL) CEO Tim Cook and Chief Financial Officer Peter Oppenheimer. Management remains confident about iPad growth during the December quarter. They say the expanded price points, including the iPad Mini's new price tag of $299, plus a better line up, including the iPad Air, are going to be the main drivers of unit growth during the 2014 fiscal year.

Management is also pleased with the "price elasticity" of the iPhone 4 after they tested lower prices in March. They plan to continue these plans for the iPhone 4S moving forward. The analysts say offering two iPhones this year was "a thoughtful approach" because it increases pricing flexibility even more and allows for multiple refreshes each year, just like with the iPad.

Improving Apple's gross margins

Morgan Stanley analysts believe Apple Inc. (AAPL) is successfully making progress on stabilizing its gross margins. They note that warranty expense as a percentage of hardware revenue rose from a year ago because of what they believe to be conservative estimates from Apple Inc. (AAPL) on warranty costs for the iPhone 5S and 5C early in the product cycle.

They also said the 200 basis point headwind may begin to ease along with product costs, which fall the longer a product is in production.

Apple sees opportunity in services

The analysts also note that services provide an important opportunity for Apple Inc. (AAPL) as usage of iOS exceeds that of Android. They said by combing more than 575 million high-end consumer accounts, most of which are linked to credit cards or checking accounts, with investments Apple Inc. (AAPL) is making in hardware could create new revenue streams. They point to the fingerprint sensor as being an important step in this direction.

Morgan Stanley continues to rate Apple Inc. (AAPL) as Overweight with a $585 per share price target.

-By Michelle Jones

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