Wells Fargo Digs In To Apple's 10-K: iPhone 6 Gross Margins May Be Below iPhone 5

Maynard Um of Wells Fargo analyzed

10-K filing which may hint of future headwinds for the company. “For the fourth quarter, we note the unusually low warranty accrual relative to cost of claims, which would suggest future gross headwinds,” Um wrote in a note to clients on Tuesday. “Conversely, Apple's accrued marketing and selling expense was a fairly substantial headwind particularly when considering it saw a large expense last quarter as well.” Um questions if his finds can be mostly related to channel price protection. However, the analyst notes that his initial findings may conclude that the iPhone 6 and iPhone 6 Plus gross margins will prove to be lower than that of the iPhone 5 in the comparable quarter a year ago. Um expects a larger warranty accrual related to the launch of the iPhone 6 which may prove to be a 210 basis points headwind. Apple could see a 100 basis point benefit from accrued marketing and selling expenses. Net of these two items, Um is concluding that Apple may see the iPhone 6 margins falling around 100 basis points relative to the iPhone 5 at the same point in the cycle. Bottom line, Um notes that Apple provides a “relative safe haven stock to be offset by gross margin pressures and secular issues as it relates to a limited market cap opportunity in the existing product segments, and a potential balance of power shift back to wireless operators from handset vendors.” Shares are Market Perform rated with a valuation range of $92 to $102 per share.