An analyst takes a close look at Apple’s margins and finds the Street’s consensus lacking
Bernstein Research’s Toni Sacconaghi gets a lot of attention from critics when he shortchanges Apple (AAPL). (See, for example, The case of the missing iPhones.)
When he comes to praise Cupertino? Not so much.
Case in point: The largely unnoticed 13-page report he issued last week on the iPhone’s gross profit margins, which he estimates at nearly 60%. At that level they not only dwarf its competitors’ (see chart at right), but they could reshape Apple’s business model as the iPhone’s share of the company’s overall revenue stream grows from 30% in fiscal 2009 to an estimated 45% to 50% in fiscal 2011.
Sacconaghi’s starting point is the Street’s consensus, which assumes Apple’s overall gross margins will decline by roughly 10 basis points over the next two years. That implies, Sacconaghi says, one of two bad things: 1) a $100 drop in average iPhone prices and a 700 basis point drop in iPhone gross margins or 2) a significant erosion in the rest of Apple’s business.
Wrong on all counts, says Sacconaghi.
He points to:
- iPhone prices. They’re going up, not down, from an average wholesale price of $588 in fiscal Q3 2009 to $638 in Q1 2010.
- Eager buyers. There is no sign of price resistance from either customers or carriers. Indeed cellular carriers are still lining up to get the iPhone; Apple added 15 new ones over the past 4 months.
- Historically higher margins. “We note,” writes Sacconaghi, “that Mac gross margins are an estimated 2000 [basis points] above competitors and that a substantial gap in profitability has existed for more than a decade, widening along the way. We would argue that the reason for such margin disparity is that Apple’s products have unique software and user experiences, which differentiates them from commodity hardware offerings.”
The bottom line: Assuming that average iPhone selling prices remain constant, Sacconaghi estimates that the iPhone will boost Apple’s overall gross margin 120 basis points in fiscal 2010 and “a stunning” 385 to 513 basis points in fiscal 2011. See his spreadsheet below:
Separately:
- Sacconaghi estimates iPad’s gross margin to be in the 30% to 32% range, not the 50% estimated by iSuppli’s virtual tear down. (See here.)
- He’s reducing his iPhone shipment estimates (by 1.3 million units in FQ4 10 and 5.5 million in fiscal year 2011) under the assumption that there won’t be an iPhone for Verizon (VZ) before mid 2011. He expects T-Mobile (DT) will get the iPhone before Verizon does.
Sacconaghi rates Apple “outperform” with a price target of $250. “We believe that on a cash flow basis the stock is very attractively valued,” he writes, “and that the stock is the most attractive secular name in our coverage universe.”
[Follow Philip Elmer-DeWitt on Twitter @philiped]
