Piper Jaffray analyst Gene Munster released a research note on Thursday saying that buy-side investors’ concerns that Apple’s gross margin will see a two-year decline to below 30% is not likely, noting the company’s ever important iPhone margins are stable.
Munster believes investors are unduly worried about an Apple margin dip as the company prepares to enter the mid-tier smartphone market with a rumored low-cost iPhone. Such a device, the argument goes, will cannibalize the flagship iPhone’s market share and pull down overall gross margin, as the handset is a major profit driver for Apple.
“We believe concern that margins will drop below 30% in the next 2 years is overblown,” Munster wrote in the report. “While we believe iPhone margin is stable, we can build a case for a 32% gross margin in 2015 (Street at 37%), but it would require a nuclear meltdown in Apple’s model including 50% cannibalization of the regular iPhone from the cheaper iPhone, a 15% margin on the cheaper phone, and a 10% margin on the TV.”
Munster was referring to the much rumored Apple television set that is reportedly being developed. Televisions are traditionally a low-margin product.
The analyst currently sees iPhone margins as being about 55% despite Apple’s drop in gross margin from 42.8% in June 2012 to 37.5% in March 2013. Munster believes the downturn in the most recent quarter likely caused by strong iPad mini sales, and an estimated $414 million hit from the combination of new Chinese warranty policies and what Apple called an “unfavorable adjustment.”
Munster says if iPad minis were removed from Apple’s margin calculations from December 2012 to March 2013, the result would be a rise in overall gross margin, from 39.7% to 40.2% over that period.
He also addressed the effect of a low-cost iPhone, modeling sales at 50 million units for 2014, and 100 million units in 2015, down 25 million each year, as the handset has yet to appear. Implying a 50% cannibalization rate to the full cost iPhone and an adjustment in margin from 15% to 30%, the net result is an overall margin reduction of 40 basis points in 2014 and 140 bps in 2015.
As for an Apple television, Munster doesn’t see such a product entering the picture until 2014, and hasn’t as yet included it in his model. When the product is released, Munster expects that margins could be as high as 20%, but normally televisions carry gross margins of 10% or below.
Munster maintains an Overweight rating for AAPL, but has adjusted his price target to $655 from $688.