Apple’s declining profitability: Structural or seasonal?

February 4, 2013, 11:48 AM UTC

FORTUNE — Apple’s (AAPL) quarterly gross margin — the measure of how efficiently a company turns sales into profits — peaked in March 2012 at an astonishing 47.4%, along with its quarterly stock performance (up 29%).

But what goes up must come down, and when Apple warned Wall Street that its margins were likely to fall — to 36% last quarter and somewhere between 37.5% and 38.5% this quarter — the stock went into a four-month swoon.

The fact that Apple beat its GM guidance for Q1 2013 — returning 38.5% profits rather than 36% — fell on deaf ears. The Street was convinced that the days of Apple’s 40-plus percent margins were over. The change, as they say, was structural, not seasonal.

But in a note issued early Monday, Morgan Stanley’s Katy Huberty finds evidence in Apple’s SEC Form 10-Q that the season of lower margins may be ending, and that the company’s GM% — and share price — could improve significantly in the second half of 2013.

She highlights three bullet points: (I quote)

  • Lower planned purchases of production equipment sets up for higher iPhone 5S margin. The 10-Q discloses $904M of commitments for equipment purchases compare to $4.5B just two quarters ago when Apple invested in new in-cell touch displays for the iPhone 5. The decrease is likely due to iPhone 5S not requiring significant hardware changes, therefore iPhone GM could be much higher in C2H13.
  • NAND prices hurt in December but could ease. Deferred margin on component sales represents Apple’s component cost advantage relative to spot prices and correlates with Apple’s GM. This metric deteriorated in C2H12 but could improve going forward given the recent increase in spread between NAND contract and spot prices. A more favorable NAND contract price trend is consistent with Apple increasing NAND in the 9.7” iPad last week.
  • Apple’s off balance sheet purchase commitments not worse than seasonal. Purchase commitments of $19.8B fell 10% Q/Q vs. five-year average of -12%, and suggest C1Q13 revenue could trend closer to seasonal average of -17% vs. our model of -21%

Like most sell-side Apple analysts, Huberty lowered her price target after last month’s earnings report, to $630 from $714. But in her bull case scenario — in which Apple releases a new iPad and a lower-cost iPhone this summer, cuts a deal with China Mobile by 2014 and returns more cash to shareholders — the stock hits $980 by next February.