Why Morgan Stanley calls Apple its top stock pick

Apple is experiencing strong trading at present. Company shares have outperformed the S&P 500 by 10 points, and its stock is near its all-time high.  While it faces headwinds and criticism, Morgan Stanley says Apple is its top stock pick heading into 2025, here are some of its reasons why:

Watch the AI rollout

The analysts are very positive about Apple Intelligence. While initial sales data suggests the feature hasn’t driven a hue spike in iPhone sales (though I think relative to the rest of the industry the story may be more positive than that), Morgan Stanley point out that Apple Intelligence isn’t available everywhere yet. As AI features and availability expand, the analysts expect iPhone demand to increase, reaching 258 million units in FY 2026. Replacement cycles do appear to have reached around 5 years, they implied.

Does this mean iPhone gross margins have peaked? Not according to the analysts, who still see a trend toward higher value devices. They also see some component costs falling and continues services revenue will likely drive future growth.

Services – going up…

But can services revenue growth continue at the current rates?

Morgan Stanley thinks it will:

“Yes, and we forecast Services growing at an 11.4% CAGR through FY27 vs. consensus at 10.6%. Importantly, less than 50% of Apple users pay for Services today, which when coupled with (1) an installed base growing MSD Y/Y, (2) pricing power that can add 6 points to annual Services growth, and (3) new Services launches in the future, including potential paid AI Services that could add $7-14B of incremental Services revenue (5-11%) in FY27, we are confident in the sustainability of double-digit Services growth.”

Regulation and political stuff

Apple faces lots of regulatory pressure and may be impacted by the ongoing case against Google. Morgan Stanley does see regulation as the big threat against Apple but thinks the company may be able to mitigate against that in several ways, not least by the introduction of its own search engine. Apple has, after all, already got proprietary search built inside Spotlight. The company may not rush to do so, however – the case against Google will rumble through the courts for a few years yet.

Finally, on China they argue that Apple may be hurt by the introduction of trading tariffs between the US and China, but suspect that Apple may yet get an exclusion on the imposition of some of these. In terms of wearables, they argue that Apple has “largely relocated production to SE Asia”, which may also have some bearing on news the company will soon commence AirPods manufacture in India.

“For FY26, our iPhone shipment forecast remains 258M units (+12% Y/Y), implying a relatively moderate replacement cycle contraction of just 0.3 years off an all-time replacement cycle high of ~5 years,” they said in a note to clients.

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