Apple Eyes Higher Profitability, Premium Mix and In-House Technologies Drive Margin Boost: Analyst

Zinger Key Points
  • BofA's Mohan reiterates Buy on Apple, sees gross margin beat with service mix boosting profitability.
  • Apple's vertical integration & premium device mix to drive margins, with services base poised for growth.

BofA analyst Wamsi Mohan maintained a Buy rating on Apple Inc AAPL with a price target of $225.

Mohan noted that historically, Apple investors have tended to look at existing products and the profitability associated with those products and services to measure the company’s future performance. 

He went back to 2018 to see where the 2023 consensus gross margins were in 2018. 

Also Read: Apple’s New Office Space in Coral Gables Signals Further Expansion into Latin America

The Street was modeling fiscal 2023 gross margins for Apple at 39%, but Apple printed 44% gross margins, significantly exceeding (500bps) original expectations. 

Mohan noted that the Street continues to underestimate Apple’s long-term gross margin potential across both products and Services yet again. 

He emphasized about 180bps of Product gross margin upside and about 150bps of Services margin upside over the next few years. 

He noted that Apple’s gross margins are headed significantly higher, driven by an increased mix of services within the overall portfolio, which should account for about 60bps of margin improvement through 2026. 

The large drivers of product gross margin include Apple’s vertical integration using its internal modem, which could add up to 110bps of product gross margin and 160bps of iPhone gross margins, per the analyst. 

He also noted the mix as favorable, with customers choosing higher-end products like pro-iPhone models).

He noted that given the focus on monetizing Service revenue across the plus 2 billion installed base of devices, the cost of delivery of these services becomes important. 

As the business continues to scale, Mohan noted Apple in-sourcing server chips and reducing reliance on public cloud providers, thereby driving cost savings. 

He estimated that this could drive Service margins higher by a minimum of 100bps (and potentially much higher if Apple-owned data centers also eventually move to Apple silicon).

Consumers are opting for more high-end devices (higher price), but Mohan also expects Apple to raise the pricing of individual hardware devices over time, which can be accretive to gross margin. 

Further, although large, the services installed base only has about 300 million or so paying customers, which he noted can grow significantly over time.

Mohan projected fiscal 2024 sales and EPS of $396.24 billion and $6.70.

Apple stock gained over 5% in the last 12 months. Investors can gain exposure to the stock via Vanguard Information Tech ETF VGT and SPDR Select Sector Fund – Technology XLK.

Price Action: AAPL shares traded higher by 3.50% at $173.65 on the last check Thursday.

Image Source – Apple

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