Apple's iPhone Production Hike and Pricing Power Signal a Potential Turnaround in 2025

The stock market has long been a theater of contradictions. For much of 2025, Apple (AAPL) has traded in the shadows of its peers, its shares down over 7% year-to-date despite a backdrop of robust iPhone sales and a Services segment that now generates $26.6 billion in quarterly revenue. Yet, as Morgan Stanley's latest upgrade suggests, the company may be on the cusp of a renaissance. The firm's analysts, led by Erik Woodring, have not only raised their iPhone production forecasts but also highlighted a structural shift in Apple's ability to expand margins and leverage pricing power—a combination that could justify a bullish repositioning ahead of the iPhone 17's launch.

The Production Catalyst: A 54 Million Unit Build and Strategic Diversification

Morgan Stanley's upgraded forecast for Apple hinges on a critical assumption: that the company's production capacity and pricing discipline will drive a meaningful acceleration in revenue and margins. The firm has increased its Q3 2025 iPhone build estimate to 54 million units, a 8% jump from its previous projection. This revision is not arbitrary. It reflects strong sell-through in the June quarter, reduced channel inventory, and a strategic shift in manufacturing to India and Vietnam. Over 50% of U.S.-bound iPhones are now produced in India, a move that mitigates tariff risks and reduces reliance on China. Vietnam, meanwhile, is the primary hub for iPads, Macs, and wearables.

This geographic diversification is more than a cost-saving measure—it's a hedge against geopolitical volatility. By spreading production across multiple regions, Apple is not only insulating itself from potential trade disruptions but also optimizing its cost structure. The firm's gross margin in Q2 2025 hit 47.1%, a modest but meaningful improvement from 46.6% in the prior year. Morgan Stanley anticipates this trend will continue, with gross margins expanding by 50 basis points annually through 2027, driven by favorable product mix shifts and cost efficiencies.

Pricing Power: The Underappreciated Lever

While production numbers are compelling, the real story lies in Apple's pricing strategy. For two years, the company has held its Services pricing steady, a decision that Morgan Stanley argues is an “underappreciated lever” for margin expansion. The Services segment, which now accounts for 28% of Apple's revenue, operates at a gross margin of 75.7%, far outpacing the 35.9% margin for hardware. This disparity underscores the value of Apple's ecosystem—a sticky, recurring revenue stream that is less susceptible to macroeconomic headwinds.

The firm's analysts point to the potential for Services pricing increases as a key catalyst. With inflationary pressures easing and consumer spending stabilizing, Apple could raise subscription fees for Apple Music, iCloud, and Apple TV+ without triggering churn. Such a move would directly boost margins while maintaining the company's premium brand positioning. Moreover, the Services segment's growth in emerging markets—where Apple is expanding retail and digital infrastructure—provides a tailwind for long-term monetization.

The iPhone 17: A Make-or-Break Moment

The launch of the iPhone 17 in October 2025 will be a pivotal test for Apple's turnaround narrative. Morgan Stanley's current forecast of 78 million units for the December quarter assumes strong demand for the new models, particularly the Pro variants. The firm's confidence is bolstered by pent-up demand for new iPhones, elongated replacement cycles, and the integration of Apple Intelligence—a suite of on-device AI features that could redefine user engagement.

The AI angle is particularly intriguing. While Apple has historically lagged in AI adoption compared to rivals like Google and Microsoft, its focus on privacy-preserving, on-device AI could carve out a unique value proposition. If the iPhone 17 delivers a seamless AI experience—enhancing productivity, personalization, and user retention—Apple could see a surge in demand that justifies a re-rating of its stock. Morgan Stanley's $240 price target implies a 6.4% upside from current levels, a modest but achievable goal given the company's valuation metrics.

Valuation: A Premium with Justification

Critics will point to Apple's current P/E ratio of 35.22, which is 54% above its 10-year average. However, this metric fails to capture the company's structural advantages. The Services segment's high-margin growth, coupled with Apple's $500 billion U.S. investment plan, positions the company to outperform in a world where capital efficiency and innovation are paramount. Morgan Stanley argues that Apple is trading in line with its trailing five-year average relative to the S&P 500, a valuation that becomes more attractive when considering its underweight position in institutional portfolios.

Strategic Recommendations: Positioning for the Turnaround

For investors, the case for Apple is clear but requires patience. The stock's current discount to its intrinsic value—driven by macroeconomic uncertainty and a lack of immediate AI breakthroughs—presents an opportunity to buy into a company with durable competitive advantages. Here's how to approach it:

1. Buy Ahead of the iPhone 17 Launch: With production forecasts and margin expansion already priced in, the actual launch could deliver a short-term pop.
2. Monitor AI Integration: The success of Apple Intelligence will be a key driver of long-term growth. Look for partnerships or features that differentiate the iPhone 17 from competitors.
3. Rebalance Exposure to Services: As the Services segment continues to grow, consider increasing exposure to Apple's ecosystem through its stock or related ETFs.

In the end, Apple's story is one of resilience. The company has navigated supply chain disruptions, regulatory scrutiny, and market saturation to emerge as a leader in a new era of AI-driven consumer technology. Morgan Stanley's upgrade is not just a vote of confidence—it's a signal that the market is beginning to recognize Apple's potential to redefine its own narrative. For those willing to look beyond the noise, the iPhone 17 could be the catalyst that turns skepticism into conviction.