Apple's gross margin may be "biggest swing factor" next week

[AppleInsider]

Apple next week is expected to announce another quarter of strong earnings, but investors may respond unfavorably should the company's gross margin not recover from last quarter's instability, one Wall Street analyst says.

"We believe the gross margin will be the key metric to watch and biggest swing factor on earnings per share (EPS) dependent on Apple's ability to capitalize on component pricing," American Technology Research analyst Shaw Wu wrote in a note to clients Thursday.

Wu, who's modeling the Cupertino-based company to beat its 33 percent margin guidance by about 50 basis points, recalled that favorable commodity prices and other "inputs" failed to translate into gross margin upside last quarter.

"Investors chose to ignore this and gave Apple a 'free pass,'" he said. "Given the macro environment, this quarter investors may not be so forgiving."

Specifically, the analyst noted that gross margin saw a significant downtick during the company's March quarter, falling 175 basis points sequentially and 219 basis points year-over-year to a five-quarter low of 32.9 percent. The decline was a surprise and "not well explained," he said.

His forecast of a 60 basis point sequential increase to 33.5 percent is partially based on checks that show pricing of key components such as NAND flash, DRAM, and hard drives, to have declined during the June quarter "seasonally, if not more."

Some other key points to watch out for during next week's quarterly report are the mixture of Apple's Mac sales and the impact of the company's ongoing back-to-school promotion, Wu said.

"The June quarter usually sees some low-end mix shift in advance of back-to-school sales," he told clients. "While Mac average selling prices (ASPs) have risen the last two quarters, we forecast a $90 sequential decline (to $1,438)."

Pricing is similarly impacted by the back-to-school promotion, which offers students a rebate for a free iPod touch with purchase of a new Mac. Last year's sequential decline was about $60 as a result of a similar promotion, though in 2006 the decline was only $7.

"The cost of the rebate is applied contra-revenue against the Mac and iPod sale on a pro-rata revenue basis. For instance, an iPod wholesale price of $210 and gross margin of 65 percent would imply $137 contra-revenue to Apple," Wu explained. "Assuming the Mac ASP is $1,200 for the sale (students usually lower the company average) means 85 percent or $116 contra-revenue is applied to the Mac business and $20 to iPod business."

Overall, the AmTech analyst is modeling Apple to earn $1.10 per share on revenues of $7.3 billion, fueled by sales of 2.5 million Macs, 10.5 million iPods, and 705,000 iPhones. This compares to Apple's guidance of 1.00 in EPS on sales of $7.2 billion, and the Street's consensus of $1.07 in ESP on $7.3 billion.

"We continue to see Apple as the best play on digital media in the home and a large beneficiary of the shift to mobile computing. In two of its three big franchises, Mac and iPhone, penetration is very low and starting in the higher-income demographics," he told clients. "The disturbance in the macroeconomic environment is within lower-income demographics and financial institutions with exposure and impact to overall liquidity. This could certainly spread, but we believe Apple’s business will remain strong in the near- to medium-term. Enough high-end consumers are still buying tech."

Wu reiterated his Buy rating and $220 price target on shares of the Mac and iPhone maker.

[ View this article at AppleInsider.com ]

[rbonner]

Can someone define 'price target'? How far out are these price targets shooting for? I assume long term, but how long term?

[SpamSandwich]

Wu's a crazy man who won't be stopped by things like..."reality".

[echosonic]

Originally Posted by SpamSandwich

Wu's a crazy man who won't be stopped by things like..."reality".

[vinney57]

Anybody who buys and sells shares on the recommendations of these assclowns deserves what they get.

[jasonfj]

6hr lines for iPhones, 1 million sold in 3 days, market share up to 3rd place. Profits up 38%. AAPL: down.

What on earth does it take to get a positive response from Wall St???

[Drealoth]

Originally Posted by jasonfj

6hr lines for iPhones, 1 million sold in 3 days, market share up to 3rd place. Profits up 38%. AAPL: down.

What on earth does it take to get a positive response from Wall St???

Nobody was surprised that there would be 6hr lines for iPhones, and so at the time of the new iPhone's release, the stock already reflected that.

[jasonfj]

Originally Posted by Drealoth

Nobody was surprised that there would be 6hr lines for iPhones, and so at the time of the new iPhone's release, the stock already reflected that.

My point was that Apple are enjoying a period of great success on all levels. Regardless, stock price is down over the 3 month period.

[zinfella]

Originally Posted by AppleInsider

Apple next week is expected to announce another quarter of strong earnings, but investors may respond unfavorably should the company's gross margin not recover from last quarter's instability, one Wall Street analyst says.

"We believe the gross margin will be the key metric to watch and biggest swing factor on earnings per share (EPS) dependent on Apple's ability to capitalize on component pricing," American Technology Research analyst Shaw Wu wrote in a note to clients Thursday.

Wu, who's modeling the Cupertino-based company to beat its 33 percent margin guidance by about 500 basis points, recalled that favorable commodity prices and other "inputs" failed to translate into gross margin upside last quarter.

"Investors chose to ignore this and gave Apple a 'free pass,'" he said. "Given the macro environment, this quarter investors may not be so forgiving."

Specifically, the analyst noted that gross margin saw a significant downtick during the company's March quarter, falling 175 basis points sequentially and 219 basis points year-over-year to a five-quarter low of 32.9 percent. The decline was a surprise and "not well explained," he said.

His forecast of a 60 basis point sequential increase to 33.5 percent is partially based on checks that show pricing of key components such as NAND flash, DRAM, and hard drives, to have declined during the June quarter "seasonally, if not more."

Some other key points to watch out for during next week's quarterly report are the mixture of Apple's Mac sales and the impact of the company's ongoing back-to-school promotion, Wu said.

"The June quarter usually sees some low-end mix shift in advance of back-to-school sales," he told clients. "While Mac average selling prices (ASPs) have risen the last two quarters, we forecast a $90 sequential decline (to $1,438)."

Pricing is similarly impacted by the back-to-school promotion, which offers students a rebate for a free iPod touch with purchase of a new Mac. Last year's sequential decline was about $60 as a result of a similar promotion, though in 2006 the decline was only $7.

"The cost of the rebate is applied contra-revenue against the Mac and iPod sale on a pro-rata revenue basis. For instance, an iPod wholesale price of $210 and gross margin of 65 percent would imply $137 contra-revenue to Apple," Wu explained. "Assuming the Mac ASP is $1,200 for the sale (students usually lower the company average) means 85 percent or $116 contra-revenue is applied to the Mac business and $20 to iPod business."

Overall, the AmTech analyst is modeling Apple to earn $1.10 per share on revenues of $7.3 billion, fueled by sales of 2.5 million Macs, 10.5 million iPods, and 705,000 iPhones. This compares to Apple's guidance of 1.00 in EPS on sales of $7.2 billion, and the Street's consensus of $1.07 in ESP on $7.3 billion.

"We continue to see Apple as the best play on digital media in the home and a large beneficiary of the shift to mobile computing. In two of its three big franchises, Mac and iPhone, penetration is very low and starting in the higher-income demographics," he told clients. "The disturbance in the macroeconomic environment is within lower-income demographics and financial institutions with exposure and impact to overall liquidity. This could certainly spread, but we believe Apple’s business will remain strong in the near- to medium-term. Enough high-end consumers are still buying tech."

Wu reiterated his Buy rating and $220 price target on shares of the Mac and iPhone maker.

[ View this article at AppleInsider.com ]

Oh, it's Wu again!

[rbonner]

Just went to our local Apple store (Austin, TX) for a genius appointment. Was surprised to see a line of about 100 people for the iPhone. I was also impressed how they had the line entering the store into a partitioned area, allowing the remainder of the store to function as usual.

[Thomaspin]

These conflicted, insider trading Wall Street analysts are clueless.

Isn't Wu the fellow who downgraded then upgraded AAPL in a 10 day period earlier this year?

What they should be doing is watching Jobs's last three or four keynotes and following him around to see the frequency of visits to the oncology center. Just compare the last two keynotes. In the latest his face is sunken and ashen, his clothes loose and ill fitting, the spring gone from his step. This man is not well.

Add the 150+ foot yacht he has on order and there you have the only analysis you need for AAPL for the rest of 2008.

Expect a 40% drop when the CEO announces he has to retire. They may well dividend some of that ridiculous $20bn cash hoard at the same time - an event which is long overdue. Can you say zero succession planning? Tim Cook? Please ....

In fairness, Jobs is unique but shareholders everywhere should be asking loud questions about this issue. But no, they prefer to live in a world of obfuscation and denial crafted by Apple and the analysts who are (not doing any sort of job of) following it.

Disclosure: No AAPL position.

[solipsism]

Originally Posted by rbonner

Just went to our local Apple store (Austin, TX) for a genius appointment. Was surprised to see a line of about 100 people for the iPhone. I was also impressed how they had the line entering the store into a partitioned area, allowing the remainder of the store to function as usual.

I went to a mall situated Apple Store on Sunday. The inside of the store was not partitioned off. There was a blue-shirted door guard and two lines outside the store. The small line was for regular shoppers who they let in after other non-iPhone shoppers had left. The long like was for the iPhone buyers and was situated in the center area of the mall. I'm not sure what they moved to make the space for the snaking line dividers but a space that large couldn't have been empty.

It was pretty well organized for what it was but without any signs many got confused by what the lines were for. Including me; For all i knew the lines were separated by model capacity or based on if you were a current AT&T customer or not. Once I was introduced to an Apple rep and taken inside he just found a place at one of the displays that carried headphones on them that were free to complete the transaction. There was no organization to this as people were constantly walking by, stopping and getting crotch level trying to look at the merchandise. Apple's, not mine.

They didn't open the package or activate the device, but was told I could go to any of the Macs, open iTunes to activate the iPhone, which happened immediately for both sending and receiving calls. People complained about the activation issues but AT&T states either a 24 or 48 activation timeframe, and don't know of anyone who had to wait that long time time around. And considering that they probably sold at least 3x as many devices in the US and activated an even higher percentage of that than last year I'd say AT&T did learn from its debacle last year, even if it was still overwhelming.

[anantksundaram]

Originally Posted by AppleInsider

"The disturbance in the macroeconomic environment is within lower-income demographics ..."

Translation: "Whew! Only the poor are getting screwed by the current economic mess, and wu-hoo, I sure am glad Apple ain't for the poor! AAPL at 220 bucks, baby!!"

[Constable Odo]

What does Apple need for the stock to go up? More of everything, lots more. And prayers.

First off, iPhone 3G sales won't count for this quarter. All the earlier iPhones were deferred revenue and that little amount won't count for much either. Stolen market share from other computer makers should mean something, but only enough to keep the stock price floating about where it is. WS will again look at diminishing iPod sales and that will be enough to sink the stock about 8%. Let's face it. RIM got dumped on and now so did Google. Do you think Apple is going to stand a better chance this quarter than those stocks did? I doubt it.

Apple investors should be satisfied that Apple isn't plunging 15%, but I'm afraid those dreams of $200 shares are far off still. It's a lousy market. If you're long on Apple then just leave your money alone and hopefully by next year things will be looking up for Apple. It's a solid company with solid products and cash rich, but I guess that's just not enough to appease WS and investors to boost the stock up while other stocks are getting killed. This is a market I clearly do not understand that rewards profitable companies with stock selloffs.

I swear I do not want to see Apple hammered after reported earnings, and I can only sit back and watch for whatever happens. I'm not pulling any money out, but I don't have anything to put in if Apple's stock price pulls back considerably. It's just a frustrating situation.

[teckstud]

Originally Posted by jasonfj

6hr lines for iPhones, 1 million sold in 3 days, market share up to 3rd place. Profits up 38%. AAPL: down.

What on earth does it take to get a positive response from Wall St???

New MacBooks and Pros.

[Bageljoey]

Originally Posted by Constable Odo

I'm not pulling any money out, but I don't have anything to put in if Apple's stock price pulls back considerably. It's just a frustrating situation.

I'm with you there!
It would be nice to be sitting on some cash reserves of my own so that if AAPL did take a dip I could reinforce my position...

I still believe that Apple's growth and profitability are sustainable and that should lead to long term stock growth.

Who cares what these yahoos say or the stock does week to week?

[vinney57]

Originally Posted by jasonfj

My point was that Apple are enjoying a period of great success on all levels. Regardless, stock price is down over the 3 month period.

But it out-performed the market as a a whole and the sector. Market cap/earnings is pretty high
already, the Apple 'magic' is already factored in.

[melgross]

Originally Posted by jasonfj

6hr lines for iPhones, 1 million sold in 3 days, market share up to 3rd place. Profits up 38%. AAPL: down.

What on earth does it take to get a positive response from Wall St???

This isn't from the quarter being reported upon.

[melgross]

Originally Posted by jasonfj

My point was that Apple are enjoying a period of great success on all levels. Regardless, stock price is down over the 3 month period.

Have you looked at the market over that time period? It's just good that Apple isn't down further.

[melgross]

As some know, I'm not generally into bashing these guys, but I wonder if he's missed a few things here, or if AI's reporting isn't able to drag up these areas from his report (which is only available to those who pay the company for it).

For example, he mentions margins coming in at a slight upside, and why Apple may get pounded if it doesn't. he mentioned a couple of reasons why it should go up, and something about why it might not.

I wonder if several other things were taken into consideration.

One is that there were production delays in iPhone manufacture, which led to less phones than were expected, and very possibly, the delay in releasing the phone and software in the first place by a couple of weeks or so.

Two is the delay in the Centrino 2, which Apple will likely be basing new portables on. These could have been released in time for Apple to have had models out during the late part of the quarter, leading to the higher sales that always accompany newer models.

The surge in costs associated in bringing new products to market (iPhone, ver 2 software, App store, Os and app revisions, advertising and marketing expenses, etc).

Lower dollar buying power of Apple to its overseas suppliers. We don't know how that is denominated, but it could be a factor.

There were a couple of other areas, but I don't think they are important enough to go over.

I would think that it would be good if Apple maintained the same margins, much less increased them. If they have, that would be impressive.

According to me.

[shanmugam]

and two more factors

slowing economy

high gas prices

[SpamSandwich]

Originally Posted by jasonfj

My point was that Apple are enjoying a period of great success on all levels. Regardless, stock price is down over the 3 month period.

The larger market is pressuring all stocks, not just AAPL.

[SpamSandwich]

Originally Posted by shanmugam

and two more factors

slowing economy

high gas prices

Or the underlying problem, a devalued, worthless dollar.

[melgross]

Originally Posted by shanmugam

and two more factors

slowing economy

high gas prices

Of course, those are the two big external factors.

[backtomac]

Originally Posted by SpamSandwich

The larger market is pressuring all stocks, not just AAPL.

Yeah, this is a brutal market.

Got some GOOG? Me too. I think tomorrow will be ugly.

[melgross]

Originally Posted by SpamSandwich

Or the underlying problem, a devalued, worthless dollar.

I wouldn't go so far as to call it worthless. Zimbabwe's currency is worthless. The dollar is worth-less. A difference.

[dreamraj]

Very likely. But that'll be a good opportunity to add to positions if stocks fall really low like they did these past few days.

Originally Posted by backtomac

I think tomorrow will be ugly.

[drjjones]

I sure don't complain about the price of AAPL going from 120 to 170 in 5 months like it did from feb 28th till today. I'll be happier Tuesday night when the stock is better appreciated and overjoyed Oct 21 st on earnings day. And Halloween I'll dump enough to live on till it goes higher in Oct of 09. I bought in when AAPL was $ 25 so i'm retired now and keepin a large chunk.

[backtomac]

Originally Posted by dreamraj

Very likely. But that'll be a good opportunity to add to positions if stocks fall really low like they did these past few days.

I'm tired of trying to catch falling knives.

I've already been gouged by BAC.

[SpamSandwich]

Originally Posted by backtomac

Yeah, this is a brutal market.

Got some GOOG? Me too. I think tomorrow will be ugly.

Never bought GOOG. Way too rich for my blood.

[SpamSandwich]

Originally Posted by drjjones

I sure don't complain about the price of AAPL going from 120 to 170 in 5 months like it did from feb 28th till today. I'll be happier Tuesday night when the stock is better appreciated and overjoyed Oct 21 st on earnings day. And Halloween I'll dump enough to live on till it goes higher in Oct of 09. I bought in when AAPL was $ 25 so i'm retired now and keepin a large chunk.

If only we all had your foresight to buy thousands of shares instead of hundreds way back when...

[SpamSandwich]

Originally Posted by backtomac

I'm tired of trying to catch falling knives.

I've already been gouged by BAC.

CLWR has been a real shocker for me... after all, melgross recommended it... WAAAH!!! And don't even get me started on MO. Holy smokes! (pun intended)

[backtomac]

Originally Posted by SpamSandwich

CLWR has been a real shocker for me... after all, melgross recommended it... WAAAH!!! And don't even get me started on MO. Holy smokes! (pun intended)

Yeah I tried that too and didn't do so well.

After a couple of good years this year is putting a hurting on me.

[drjjones]

Originally Posted by SpamSandwich

If only we all had your foresight to buy thousands of shares instead of hundreds way back when...

It ain't too late. 5 years AAPL will have been $600 and we will hear the same argument

[melgross]

Originally Posted by SpamSandwich

CLWR has been a real shocker for me... after all, melgross recommended it... WAAAH!!! And don't even get me started on MO. Holy smokes! (pun intended)

Hey! It was a shock to me too. But it did do very well for a while. Sprint screwed it, but now they're back together again. Who knows? Long term?

[cameronj]

Originally Posted by jasonfj

6hr lines for iPhones, 1 million sold in 3 days, market share up to 3rd place. Profits up 38%. AAPL: down.

What on earth does it take to get a positive response from Wall St???

Um... the market already knew all that stuff. Have you noticed Apple's performance compared to the average tech stock in the past 3 months? THAT is the positive response.

[SpamSandwich]

Originally Posted by melgross

Hey! It was a shock to me too. But it did do very well for a while. Sprint screwed it, but now they're back together again. Who knows? Long term?

Yes, there's always the long term... (sob)...

[rudolf]

Originally Posted by drjjones

It ain;t too late. 5 years AAPL will have been $600 and we will hear the same arguement

http://forums.appleinsider.com/image.../1rolleyes.gif Yeah, I see AAPL there too in some time. In between it may be rough, but I'm staying in.

[copeland]

Originally Posted by melgross

Of course, those are the two big external factors.

Apple should try to get some promos here in Europe. They are making about 20% of extra profit here because of the weak dollar (a MBP for $ 1,999.- in the US translates to $ 2,400.- here in Europe). Moving some more Macs in Europe would be quite desirable. So the exchange rate is a mixed bag, it hurts Apple on the one hand but it helps Apple on the other one.

[melgross]

Originally Posted by copeland

Apple should try to get some promos here in Europe. They are making about 20% of extra profit here because of the weak dollar (a MBP for $ 1,999.- in the US translates to $ 2,400.- here in Europe). Moving some more Macs in Europe would be quite desirable. So the exchange rate is a mixed bag, it hurts Apple on the one hand but it helps Apple on the other one.

It's hard to say. If Apple pays their suppliers in dollars, at a fixed number, what you say is true. but, if as is likely, they don't, then what you say is not true.