Plus, our take on Apple’s AI strategy and key risks.
In this new episode of The Morning Filter podcast, co-host Susan Dziubinski previews this week’s PCE numbers and explains why to watch the upcoming earnings reports from Micron Technology, FedEx FDX and Carnival CCL. She sits down with Morningstar senior technology stock analyst Will Kerwin to talk all things Apple, including the strength of the company’s economic moat, its AI strategy, the biggest risks it’s facing today, and what the stock is actually worth.
They also discuss the challenges of valuing AI companies while so much is still unknown and whether investors should be willing to pay up for top AI stocks. They wrap with three tech stocks to buy that look attractive and several tech stocks that look “bubbly” today.
Episode Highlights
What this week’s inflation numbers may mean for the market
Why to watch Micron Technology’s MU earnings report this week
Whether Apple’s AAPL AI strategy is misguided and the risks the company is facing today
Are Morningstar’s valuations on AI stocks too conservative?
Undervalued stocks to buy before Wall Street catches on
Read about topics from this episode.
Apple: Hey Siri, Let's Get Apple's AI Strategy Back on Track
After Earnings, Is Broadcom Stock a Buy, a Sell, or Fairly Valued?
After Earnings, Is Arista Networks Stock a Buy, a Sell, or Fairly Valued?
This Could Be One of the Best Growth Stock Buys in Today’s Market
Got a question for Dave? Send it to themorningfilter@morningstar.com.
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If you would like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. Subscribe to The Morning Filter to get notified when we post next.
Susan Dziubinski: Hello, and welcome to The Morning Filter podcast. I’m Susan Dziubinski with Morningstar. Every Monday before market open, we talk about what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas.
Now, my colleague Dave Sekera is on vacation this week, so I’ll walk through some things to keep on your radar. I’ll then share an extensive interview I had last week with one of Morningstar’s senior tech sector analysts. We took a dive into Apple’s AAPL prospects, we discussed how to value AI stocks when everything’s changing so quickly, and we covered three undervalued stocks he says look like buys today.
We’ll start today’s episode with last week’s Federal Reserve meeting. Now, as expected, the Fed held interest rates, but stocks pulled back after new Chair Kevin Warsh appeared to lay the groundwork for an interest rate hike before the end of the year by emphasizing the importance of delivering price stability. Given that emphasis, the May PCE numbers coming out this week should be on your radar.
Earnings season has all but wound down, with only a few companies reporting this week. Micron MU reports on Wednesday after market close. The stock is up more than 800% during the past 12 months. The company is benefiting from a tremendous memory pricing cycle driven by demand for artificial intelligence infrastructure. Heading into earnings, Micron stock trades at more than twice Morningstar’s $455 fair value estimate. The stock was one of Dave’s stocks to sell on the June 1 episode of The Morning Filter podcast, so we’ll no doubt be talking about this one after earnings when Dave’s back next week.
FedEx FDX reports on Tuesday. Stock’s having a great year; it’s up about 38%. FedEx has cut costs to improve profitability. It’s also spun off its less-than-truckload shipping business into a stand-alone company. Morningstar thinks FedEx stock is overvalued heading into earnings. We think shares are worth $257.
One more earnings report coming out this week to keep an eye on is Carnival CCL. Stock’s been on an upswing lately due in part to the reopening of the Strait of Hormuz. The company’s also announced some new food and beverage concepts it’s testing across its fleet. Carnival stock is trading only a few dollars below Morningstar’s $35 fair value estimate as we head into earnings.
All right, let’s pivot over to my conversation with Morningstar’s senior tech analyst, Will Kerwin. Now, Will and I chatted at the Morningstar Investment Conference last week on Wednesday, June 17. However, the day after Will and I chatted, Morningstar raised its fair value estimate on Apple stock to $290 per share, up from $270 per share after Apple’s CEO, Tim Cook, announced plans to raise device prices to offset inflation in memory chip costs. While Morningstar expects a marginal headwind to volumes as a result, we expect pricing to create a material net increase to revenue, which led to the fair value increase. Keep in mind that Apple’s new fair value estimate is $290, and here’s our interview.
Thanks for joining me on The Morning Filter.
Will Kerwin: Great to be here.
Dziubinski: All right. Well, let’s start off today talking about Apple, which is one of the companies you cover. Now, Apple isn’t a company that Dave and I have talked about very much on The Morning Filter in large part because it’s been either fairly valued or overvalued for a large chunk of that time. Let’s start at the beginning, talk about Apple’s competitive advantages, what Morningstar thinks of the business, and maybe even touch on the idea of where Apple is in sort of its AI story, and how important is that story for Apple’s business going forward?
Kerwin: Absolutely. Well, it is a large company to get your brain to wrap around, but really, it all comes down to the iPhone. We’re all familiar with the iPhone. It’s pretty much ubiquitous across users, the device in everyone’s pocket, and that is half of Apple’s sales even to this day. It’s over a $200 billion business, just the iPhone in isolation. Then you have a high-growing services business for Apple, which includes Apple Music, Apple Pay, and Apple TV. Those are all kind of superfluous, though, to the core of that, which is payments from Google for its position as the default search browser on Apple devices, and then payments from the App Store. That together makes about 75% of the total revenue for the company, and then Mac, iPad, wearables, everything else is kind of all the et cetera at the other side of it. We really think about iPhone and services as the main drivers.
Thinking about the iPhone when we think about Apple’s wide moat rating that we have on it, it really comes down to the ecosystem around the iPhone. You have iOS as the software on the iPhone, and every auxiliary Apple product that you have, whether it’s a Mac, iPad, watch, et cetera, all serve to reinforce and lock you further into that ecosystem. The app store, the services do the same. We see that as a very sticky combination of switching costs that contribute to that wide mode rating. Now, AI is certainly at the forefront of everyone’s minds right now and has been kind of a miss for Apple over the past two years. They initially announced their AI strategy under the Apple Intelligence umbrella back in June of 2024, and it was a little bit of a flop. It was overpromised and underdelivered. That has now been rectified, we think, going into the fall of 2026.
They’ve kind of relaunched this strategy, and we really like what they’re doing going forward. They’re outsourcing that frontier model development to the likes of Google and focusing on what they do best, which is integrating those AI insights into that iOS ecosystem and into apps and features that users love. I think that’s a pretty good overview for now.
Dziubinski: OK. Let’s talk a little bit about risks that Apple may be facing. It sounds like we think that they’re sort of righting the ship with AI that might’ve been a potential risk for them. What should investors then really be keeping an eye on from a risk perspective?
Kerwin: Well, I think disruption risk is the biggest thing always for Apple. They did something to BlackBerry 15 years ago, and everyone is constantly worried about: Is Apple going to get “BlackBerried” themselves, so to speak? I think with AI now, you have this new threat on the horizon. Could this introduce a new type of device that we haven’t heard of before? But effectively, we think they are effectively defending against that disruption risk. That is underpinned by that wide moat rating that I talked about. The wide moat rating comes with a 20-year time horizon of confidence for us. We expect them to retain this competitive position, this strong position, for the next two decades. Really, when it comes to AI, I think about it like this: AI is software. We’re learning how to use it. We’re using it on these applications, but at the end of the day, in my opinion, for the foreseeable future, software has to be consumed on hardware on a device, and Apple really is the preeminent devicemaker.
We see it as very well-positioned to integrate AI into its software ecosystem on its devices and maintain this really strong leadership position that it has. Outside of that, you have some risk from the supply chain in China that we think Apple is adequately diversifying away from. You have some antitrust risk out of the EU that is a little bit in the rearview mirror, but still a little present. It’s a large company. There are always a bunch of risks involved, but I really think the most about AI, and we think they’re doing a good job hedging against that.
Dziubinski: Well then, let’s talk a little bit about your fair value estimate on the stock. Morningstar assigns it a $270 fair value estimate. How do you arrive at that?
Kerwin: It really comes down again to those two primary drivers. You have the iPhone and what the growth looks like there, and you have the higher-growth services business and what it looks like there. In the current year ’26, the iPhone is having a phenomenal growth year. The iPhone 17 family has been very well received, and this is actually unrelated to AI. It’s really related to some of maybe the more boring things that Apple does very well, a new camera, a better operating system, a better processor. We’re seeing a high-growth year for the iPhone in the short term. In the longer term, we think the growth rate of that is slowing into the healthy mid-single-digit range, call it 5% or 6%. That’s kind of the primary lever into our valuation. We think of more of a double-digit growth trajectory for that services business.
And then you also have expanding profitability for Apple. This is from a combination of those services rising as a mix of total revenue and coming at a higher profit margin, but also like-for-like on hardware, as Apple integrates more of its supply chain, chips, auxiliary components, under its own umbrella, it’s able to extract a margin on those and raise those margins. I really think those are the three key inputs there. When you think about our $270 valuation compared to the stock, which is trading around $300 today at the time of recording, so a little bit overvalued at about 10%. Really, we think that there’s some excitement around the AI rectification, if you will, in the market. For us, it comes down to, how will that impact iPhone sales? What we’ve seen is that over the past two years, iPhones have sold very well, and now you have all of this updated hardware in consumers’ hands that can already run this software update that’s to come. We don’t see this rectification, this update coming in the fall of ’26 as driving an inflection in iPhone sales. That just leads to us being a little bit behind where the market is right now on what the stuff is worth.
Dziubinski: OK. Well, let’s talk a little bit more about AI because your coverage list reads like a “who’s who” of AI beneficiaries. You cover Micron, you cover Marvell Technology MRVL, you cover Broadcom AVGO. I think something that we’ve seen, I mean, I’ve been around Morningstar a pretty long time, and it seems like we’re seeing a bit more change in Morningstar’s fair value estimates, maybe over time in a given year, and by bigger percentages, let’s say, than maybe we’ve seen in the past. Of course, that’s because of the AI story and how that’s evolving and changing. Can you talk a little bit about how challenging it is, or how you actually value tech stocks that are so dependent on the AI story, as that story is still being written?
Kerwin: Well, it’s challenging. I think that might be underselling it. When I joined the equity research department at Morningstar, our global director told us our job was to predict the future. You can only hope to get it right some of the time, not all of the time. I think what’s interesting about AI is that it’s really accelerating the pace of development of how things are updated, how theses get updated in the market. Everything is just faster to keep up with. You get more data points, new data points happening faster every passing week. It becomes challenging to keep up with it, to your point. I think one of the effects of that is that you mentioned that our valuations have changed more often. That’s certainly true because we have all this data that’s moving so fast. But another thing is that our uncertainty ratings have generally, I would say, risen across the board—certainly across my list—because there is just a wider range of outcomes.
Really, I think when you think about AI spending as kind of the spending from the people that are building these models, it’s all a question of: How rapidly is this going to grow, and if and when at any point in the future is this going to slow down? Is it going to correct at some point? Are we in a bubble? These are the questions we get from our clients. I think if you had asked me two years ago, I would have said a date sooner than I think now. Right now, it seems like all of this demand is pretty much locked in through at least 2028, but after ’28, does it slow down? Does it keep going until 2030? Does it keep going for the next 10 years? It really becomes a challenging multivariate question to determine. Really, everything is going up and to the right, right now, and I think the key question is: When does that slow down a little bit, and when do we get back to some semblance of normality, if ever?
Dziubinski: Would you say that Morningstar, are we, would you say, more conservative than the street when it comes to valuing AI stocks?
Kerwin: I wouldn’t say we’re more conservative. I think the core tenet of Morningstar is being long-term focused. What I’ve seen in the AI trade is probably a lot more speculation versus investment, in terms of short-termism and chasing stocks up over their prospects in a given year or in a given quarter. That is just not a game that we’re going to play. We’re going to try to tell our clients what a fair price is for this stock to be a long-term holder of the stock. I think of memory stocks, for example, where in the short term they are absolutely ballooning, prices are going through the roof, they’re supply-constrained. We may talk about those a little bit more later, but we think that’s a short-term dynamic. That’s not a stock that we like to hold and close your eyes for the next five years and come out on the other side. And so, yeah, maybe we look more conservative on those, but I still wouldn’t call it conservatism. I would say having a kind of wider angle and a longer-term view.
Dziubinski: OK. Now, given the challenges of valuing AI companies, we’ve talked about that. How should investors be thinking about investing in AI stocks? I think normally at Morningstar, we would say, well, you still want to look for that margin of safety. You want to take the uncertainty into consideration. Really, you want to be buying at that 4- and 5-star level, you want to be selling at that 1- and 2-star level. Given the additional uncertainty here, is there any reason for an investor to think differently about, “Well, maybe I should be willing to pay a little bit more for these stocks? ”
Kerwin: I think it obviously depends on a case-by-case basis, but I come back to sort of this question of speculation versus investment, and really, I come back to focus on quality. I think of the Warren Buffett quote, “I would rather pay a fair price for a great company than a great price for a fair company.” That’s kind of how I feel about the AI trade. You see all of this speculation and prices going up and up and up for some of these stocks that maybe are not necessarily the best position; they may be doing well right now, but they may not be doing that great in two years, maybe even in one year. There are still some very high-quality stocks that are benefiting from the AI trade that we don’t think are seeing that same level of speculation and offer a better entry point to investors.
Dziubinski: All right. Well, then, let’s get to it, because as you may know, on The Morning Filter, it’s a tradition. We always have picks at the end of the show. Dave’s not here with us today, so guess what? It’s your job to bring us some picks.
Kerwin: I always want to talk about picks.
Dziubinski: And you’ve done that, and we appreciate it, Will. You brought us three undervalued stocks from your coverage list that you think are really great investment ideas right now. Your first pick is Broadcom. This was one of Dave’s picks. You’ll be glad to know we agreed with you. This was one of Dave’s picks back in April. Now, the stock hit an all-time high in June, yet it’s still trading well below Morningstar’s fair value, which is $650. Why do you like it?
Kerwin: I think this is an example of what I was just talking about. An extremely high-quality company, in fact, extremely well exposed to the AI trade in my view, but just has kind of missed out on the runup over the past six to 12 months. We see Broadcom as the number two pure play in AI compute chips. I think everyone who’s listening has heard of Nvidia NVDA, at least to some extent. Broadcom is the number two there, and what they do is a little bit different. They do customized versions of those Nvidia GPUs. We call them XPUs. You may also hear custom AI compute chips, A6, a lot of alphabet soup, but essentially these are customized for a specific customer, a specific application, and they can be more efficient than an Nvidia GPU because Nvidia’s GPUs are general purpose. They can serve a lot of applications very well, but they’re not going to be specified to one application.
Broadcom dominates this market. They’re seeing extremely good growth from these chips, and yet the market has been a little bit nonplussed over the last six months. There are some worries about competition with Nvidia. There are some worries about competition coming from the lower end of the tier from Broadcom taking some of that away. We don’t share those concerns. We think the fundamentals are flawless, and if anything, we think they’re accelerating into 2027 and 2028. You mentioned the all-time high in June. It’s come down quite a bit since then, actually, because Broadcom failed to raise its guidance for 2027. They did not cut guidance; they just failed to raise it. And really, when you heard the commentary from management, they said that in reality, in the background, it has come higher, but it wasn’t enough for them to give a new public number to the street. We think all of the fundamentals are flashing green for this company, so to speak. We think the market will come around once those results start printing over the next 18 months.
Dziubinski: Your second pick is Arista Networks ANET. Now again, this is another well-run company, wide-moat stock, looks undervalued as we’re sitting here on Wednesday, taping this. Morningstar’s fair value estimate on the stock is $190. What’s to like here?
Kerwin: This is not going to be in AI compute chips, but in the connectivity of those chips. We call this networking. I’m not talking about meeting colleagues at the Morningstar Investment Conference, but connecting these GPUs together. If you think about an AI cluster or an AI model, it’s comprised of tens of thousands, if not hundreds of thousands, of these individual chips, and they are limited by how quickly they can talk to each other to train a model or to run inference on someone’s question into ChatGPT, for example. Arista does this very well. They are one of the best companies at high-performance, high-speed networking, and we see them as very well-positioned. Again, they’re growing like gangbusters. They’re performing excellently, but they’ve been weighed down by a couple of bearish narratives in the market that we don’t agree with. One is competition with Nvidia.
Believe it or not, outside of chips, Nvidia also has a very strong networking business. We see them as pretty much neck and neck with Arista. And I think the bear narrative there is that Nvidia is going to eat Arista’s lunch. We don’t agree with that. We think there is more than enough room for these two wide moat, high-quality, high-performance companies in the market. The other is that Arista might get displaced by this new trend that we call optics, which is more fiber-optic content, sending data by light. I won’t get too into the weeds, but essentially, we see them as totally agnostic to that trend. We really identify these two narratives. We disagree with both of them, which we think has merit, and so we think it’s a great time to buy it.
Dziubinski: All right. The third pick is Amphenol APH. Now, this was one of Dave’s picks about a month ago; he talked about on the episode of The Morning Filter, how Amphenol was one of the few commodity-oriented tech hardware stocks that still looked undervalued at the time. Morningstar’s fair value estimate on the stock is $190. So, what’s the pitch?
Kerwin: Well, I would push back on Dave calling it a commodity. We actually see that this tech is pretty differentiated, and that’s why it has a wide moat, actually. We’re going to go to another derivative of the AI play. We went from kind of the compute chips with Broadcom, the connectivity of those chips with Arista, and now these are kind of individual components that feed into that connectivity that Arista is doing. If you think of Arista selling effectively a box that includes a semiconductor and a lot of equipment within that and surrounding that, what Amphenol does best is every point you have connectivity within there, whether it’s an electrical wire, whether it’s a fiber-optic cable, or whether it’s even just power going into a chip or one of these boxes, they’re at those connection points. Those are in play for them. They’re the best at what they do, specifically in these data center applications.
You’re going to sense a familiar theme. They are growing like crazy. They’re doing extremely well in AI infrastructure in the data center, and yet there’s a bear narrative in the market that has kind of led the stock to flag a little bit. That’s really centered around this optics discussion as well, which I said with Arista, where the market has come to view that Amphanol is worse off in a world that has more fiber-optic content than in a world that has more copper content. And we don’t agree. We think that Amphenol has actually been upgrading its optics portfolio. We think it is way better-positioned than the stock would seem to imply, trading at these levels. Again, best of breed, extremely high-quality company, and the results really speak for themselves. It is growing phenomenally. The profit margins are expanding. So, I sometimes speak too effusively about this company. I think Amphenol is just really a blue-chip stock and rarely cheap, but we think it’s a great entry point today.
Dziubinski: All right. Well, those are three stocks you like on your coverage list. Now, let’s close with: What are some of the stocks on your list that maybe Dave would call kind of “bubbly,” which means the market’s sort of gotten ahead of itself in your opinion on them?
Kerwin: Yeah. We have to end on a negative note, I guess. Well, I mentioned memory earlier, so I may have stolen the lead, but I think memory is a classic example of a stock that is not for Morningstar-type investors. In terms of long-term, high-quality, positive fundamentals, those are not the characteristics that we see in memory stocks. Now, the performance in the short term has been nothing short of breathtaking. We are seeing a supply-constrained market for a commodity chip. These memory chips are fungible in our view, whether you’re getting them from SanDisk, from Micron, from Samsung, from SK Hynix, they can all do the same thing. When you have a supply-constrained market, we come back to Econ 101, you reach a market-clearing price, and these prices have just been going through the roof because demand is high and they can’t build out new supply quickly enough.
Now, that’s generating immense growth, huge profit margins for these companies, but we think this is finite. We think it is part of a cycle. There are some bulls in the market that are saying that AI is kind of the end of cycles in the memory market. We disagree. What I’ve been calling this is really a particularly strong and particularly durable upcycle, but a cycle all the same. What I look to is this whole host of six memory makers primarily in the market, building out a whole, large amount of new supply in late 2027 and 2028. We think that’s going to apply some downward pressure on these lofty prices and bring these results back down-to-earth a little bit, and likely, in my view, also the stock prices.
Dziubinski: All right. Well, Will, thank you for your time today. We really appreciate it, and we’re going to have you back.
Kerwin: Yeah, it flew by. I had a blast. Thank you.
Dziubinski: Thanks for spending some of your time today with The Morning Filter. Viewers and listeners who’d like more information about any of the stocks we discussed can visit Morningstar.com for more details. Dave will be back next Monday, and we hope you’ll join us for the podcast at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.