Apple Inc. (NASDAQ:AAPL)’s gross margins could be in recovery mode thanks to the launch of an S iPhone upgrade rather than a complete redesign.
Apple Inc. (NASDAQ:AAPL) will release the results from its September quarter in 20 days, and analysts are mostly positive heading into those results. Wells Fargo Securities analyst Maynard Um is expecting the company to report gross margins approaching 40 percent by the end of the calendar year.
Apple’s S iPhone upgrades have stronger margins
Um is projecting that Apple Inc. (NASDAQ:AAPL)’s gross margins for the December quarter will be 39.6 percent and then rise even higher—as much as 40 percent—for the March quarter. Gross margins have been a big concern for investors, particularly after they took a hit in the wake of the iPhone 5 release. However, the S upgrades for Apple Inc. (NASDAQ:AAPL) tend to have bigger margins because they aren’t a complete redesign of the handset.
Historically, Apple Inc. (NASDAQ:AAPL)’s margins fell after the launch of the iPhone 3G, the iPhone 4 and the iPhone 5. However, they rose after the launch of the iPhone 3GS and the iPhone 4S. As a result, it would make sense that we will see higher margins this time around.
Apple’s margins peaked last year
The company recorded its highest ever margin during its second fiscal quarter in 2012 after the iPhone 4S came out. At that time, margins were 47.4 percent. By the end of the June quarter, they had dropped to 36.9 percent.
If Apple Inc. (NASDAQ:AAPL) shows big progress in gross margins in its September quarter results, Um believes it will begin to allay investor worries about saturation and commoditization in the high end of the smartphone market. He suggests as well that the company could expand its iPhone lineup since at this point it has only 280 carriers on board to offer its iPhone. BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) meanwhile, had 650 when it was in its heyday.
In his latest report, Um reiterated his Outperform rating on Apple Inc. (NASDAQ:AAPL), along with his price target of $525 to $575 per share.