Apple Inc. (AAPL) Stock Up After Analyst Suggests $800 ASP For iPhone

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Apple Inc. (AAPL) stock reached its highest level in more than a month after an analyst upgraded it to the equivalent of Buy. The iPhone maker was the biggest gainer in the Dow Jones Industrial Average in the early morning hours after it added approximately 17 points to the Dow. Apple Inc. (AAPL) stock climbed as high as $159.66 in early trading but stubbornly refused to approach its all-time high of $164.94, where

KeyBanc analyst Andy Hargreaves upgraded Apple Inc. (AAPL) stock from Sector Weight to Overweight and set his price target at $187 in a note to investors on Monday. He cited what he sees as the company’s “shift toward market segmentation.” He feels that the company is just starting to become more aggressive in its “market segmentation strategy,” which he believes will boost its gross margins and increase its gross profits per user.

Hargreaves downgraded Apple Inc. (AAPL) stock to Sector Weight on June 4, putting him firmly in the minority because most firms have a Buy rating or the equivalent on it. He based his downgrade on his expectation for stagnation in iPhone units, and he remains “somewhat pessimistic” on multi-cycle growth in iPhone units even now.

However, he based his upgrade of Apple Inc. (AAPL) stock on his new gross margin estimates, which pushed his fiscal 2018 earnings per share estimate from $11.07 to $11.68. He also slashed his cost-of-goods-sold estimates for the iPhone X, which raises his gross margin estimate for fiscal 2018 from 37.5% to 39.5%, versus the current consensus of 38.6%. He believes that the consensus is underestimating the iPhone X’s probable contributions.

His supply chain checks suggest that Apple Inc. (AAPL) plans to produce 40 million iPhone X units during the December quarter, so that would mean that the handset would account for more than 45% of the iPhones that are shipped during that quarter.

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If this ends up being the case, then he pegs the average selling price for the iPhone at $800. Historically, the iPhone average selling price has tended to be below $700, and if only 10% of the units shipped are the iPhone X, the average selling price would still be only $717, according to Hargreaves.

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Hargreaves speculates that the first iPhone buyers will probably be the company’s “most inelastic customers,” which presumably means those who want only Apple Inc. (AAPL)’s best and won’t compromise. It’s really no secret that the initial supply of the iPhone X is expected to be extremely constrained, so by the time the supply improves, he expects investor sentiment to have become more favorable due to the strong early demand.

In the meantime, the analyst believes that Apple Inc. (AAPL) stock should be supported by the company’s exercise of its pricing power and additional growth in App Store sales. He feels that these two things should support the view of Apple Inc. (AAPL) as “a franchise with subscription-like qualities rather than a hardware business.” In turn, he expects this sentiment to keep trading multiples on Apple Inc. (AAPL) stock higher than recent averages. He added that Apple Inc. (AAPL) stock has gained only 2% since his June downgrade, versus the S&P 500’s 5% gain during the same timeframe.

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Hargreaves isn’t the only analyst to be considering the profit implications from the much more expensive iPhone X. Barclays analyst Mark Moskowitz boosted his price target on Apple Inc. (AAPL) stock from $146 to $161 in a note on Friday, but he reiterated his Equal-weight rating as he apparently isn’t ready yet to upgrade to a Buy-equivalent rating. He also raised his earnings and sales estimates for 2018.

He warned that investors who are expecting the iPhone X to have an effect similar to that of the iPhone 6 could end up being disappointed, and he’s not the first to warn that the so-called “super cycle” most of Wall Street is calling for might never materialize.

The iPhone 6 did drive a massive device upgrade cycle, but its screen space was a lot larger than its predecessor, and it was much thinner. However, the iPhone X offers only a 20% increase in screen space than the iPhone 7, so Moskowitz questions whether buyers will be willing to cough up 369% more money than for other smartphones.

We would add that until most app developers catch up to the changed shape, the iPhone X won’t have nearly as much usable screen space as Apple Inc. (AAPL)’s other iPhones. The reason is because there will be a bar across the top and bottom edges due to the new aspect ratio, as was seen in a recent photo of the iPhone X “out in the wild.”

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