Apple Inc. (NASDAQ:AAPL) has had a tough twelve months. After shares briefly peaked above $700 last year for the first time, the company’s stock crashed. Investors and analysts wrote and spoke about the company’s gross margin failing, its loss of the Chinese market, its lack of enterprise offerings and, most often, its innovation problem.


A new report from Morgan Stanley (NYSE:MS) takes a look at Apple Inc. (NASDAQ:AAPL)’s prospects, and concludes that the third quarter of 2013 marked an inflection point for the company. Katy L. Huberty, the lead author of the report, put a price target of $540 on the company’s stock and rated the Cupertino Company at Overweight.

Apple’s turning point

The third quarter saw a couple of key developments at Apple Inc. (NASDAQ:AAPL). The release of iOS7 and the iPhone 5s were examples of “meaningful innovation,” according to Huberty. The company’s iPhone sales will likely be up in the fourth quarter as a result. Morgan Stanley (NYSE:MS) is modeling for 55 million iPhone sales in the fourth quarter, even after discounting for lower iPhone 5c sales.

Huberty reckons Apple Inc. (NASDAQ:AAPL) is heading for a landmark quarter when it reports earnings later this month. She is modeling for revenue of $37 billion, an EPS of $8 and a gross margin of 37 percent. Apple Inc. (NASDAQ:AAPL) reported that it would show earnings at the higher end of guidance, and that’s where the Morgan Stanley (NYSE:MS) numbers come in.

Among the other catalysts contained in this report likely to affect Apple Inc. (NASDAQ:AAPL) through the end of the year are the company’s coming iPad, new fingerprint-based services, and potential new products stemming from supply chain information. There was another, more surprising, projection contained in the report. Apple Inc. (NASDAQ:AAPL) may release a lower priced iPhone after all.

Apple might release a cheap iPhone

Apple has cut its production targets for the iPhone 5c on a lack of demand for the smartphone, according to recent reports. Hobarty reckons that this might lead the company to cut the price of the iPhone early on next year.

If gross margins estimates on the iPhone 5c are right, Apple Inc. (NASDAQ:AAPL) could afford to take the cut. Analysts will know more about those numbers after the third quarter earnings report is released. Apple Inc. (NASDAQ:AAPL) may be forced to lower the price of the phone, but it would mean a serious loss of prestige at the Cupertino company.