Apple's gross margin could improve with 'iPhone 5S', says analyst

Whatever the next iPhone will be called—the iPhone 5S, or even the iPhone 6—one analyst believes Apple's dip in iPhone gross margin will recover with the next iteration of the popular smartphone. Here's why.
Written by Zack Whittaker, Contributor

Apple's gross margins are down year over year, and the company's share price has dropped more than 35 percent in the past six months alone. 

A dip in gross margin shows a drop in overall profitability, and this is something Apple desperately needs to claw back. 

(Credit: Apple)

Morgan Stanley analyst Katy Huberty said yesterday in a note to investors that while the financial firm keeps its $630 price target—Apple is trading at almost $200 a share lower than that at $442 per share on the Nasdaq this morning—she believes Apple can rebound again with the iPhone 5.

Why exactly? By digging through the company's 10-Q filing with the U.S. Securities and Exchange Commission, Huberty attempted to determine whether Apple's recent gross margin decline is a temporary hiccup, or part of a wider structural problem.

It's not the latter, she said, but hinted that the forthcoming "iPhone 5S"—which shouldn't be a valid indicator of what Apple will actually call the next-generation smartphone—or rather its manufacturing process could help the company bounce back.

Apple's the company's gross margin was 38.6 percent compared to 44.7 percent on the same quarter a year ago. If Apple keeps on the most part the same design as the recent iPhone 5, particularly the larger display and thinner design, then Apple can recoup some of its lost profit and regain traction on the trading floor.

From the 10-Q:

The lower gross margin expected in 2013 is largely due to anticipation of a higher mix of new and innovative products with flat or reduced pricing that have higher cost structures and deliver greater value to customers and anticipated component cost and other cost increases.

In a nutshell, Apple spent a lot on new manufacturing equipment to develop the iPhone 5 and this dinged the company's margins. It does also hint that new products might be on the way this year, but at this stage it would be beyond premature to even begin to speculate what these could be.

According to Huberty:

The 10-Q discloses $904 million of commitments for equipment purchases compare to $4.5 billion 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 [second half of calendar year 2013].

According to the Semiconductor Industry Association (SIA), the industry body behind the chip-making manufacturing and design effort, said today that while chip sales were down by 2.7 percent in 2012 on the previous year, NAND memory grew dramatically by 4.1 percent to $25.4 billion in 2012, showing an uptick in flash memory buying by tablet-focused companies.

More from Huberty:

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 [gross margin]. This metric deteriorated in [second half of calendar year 2012] 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-inch iPad last week.

Apple anticipates gross margin to be between 37.5 percent and 38.5 percent during the second quarter of 2013. Huberty, however, experts gross margin of more than 38 percent by September.

(via Barrons)

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