Apple Inc. (AAPL) GM Big Concern For Investors: Berenberg Bank

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Analysts at Berenberg Bank noted that investors are greatly concerned with the gross margins of Apple Inc. (NASDAQ:AAPL) given its pricing power and discussions about whether the ecosystem is sticky and strong. The firm recommended a sell rating and $360 price target for the stock. Shares of the company are trading around $410 per share, up by more than 1 percent around 2:00 PM in New York.

Apple Inc. (AAPL) GM Big Concern For Investors: Berenberg Bank

According to Berenberg Bank analysts Adnaan Ahmad and Jean Beaubois, Apple Inc. (NASDAQ:AAPL)’s gross margin peaked at around 47 percent at a group level wherein iPhone recorded a gross margin of 60 percent.

The analysts noted that the iPhone’s gross margin declined by 49 percent in the previous quarter, and estimated that its gross margin this quarter fell further to around 44 percent. They assumed that the rest of the businesses of the tech giant are tracking at 30 percent gross margin structure.

Ahmad and Beaubois emphasized, “Using similar math and all else being equal, iPhone gross margin should be at ~42 percent in FQ3- i.e. in 15 months the gross margin structure has declined by a whopping 1,800 bp.”

The analysts expressed certainty that Apple Inc. (NASDAQ:AAPL) will not obtain an ASP uplift, citing data from HIS iSuppli’s that bills of materials for the Samsung Galaxy S4 increased by 15 percent to 20 percent compared with the Galaxy S3. They are also certain the telecommunications carrier will not increase their subsidies to smartphones.

In their note to investors, Ahmad and Beaubois wrote, “This is the consumer electronics concept of feature creep – i.e. at each iteration of new product introduction, the cost of goods sold usually grows by a greater level than ASP growth, thus dampening margin structure.”

They pointed out that if the cost of materials is hurting Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), which obtains 60 percent of its components internally, the situation will also hurt Apple Inc. (NASDAQ:AAPL). Accordingly, they have not yet included pricing pressure in the equation.

Ahmad and Beaubois said, “The point we are making is that when things turn, they could turn very quickly.” They cited that the same thing happened with Ericsson (NASDAQ:ERIC), the king of business phones in the early 1990s, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) in the 2000s, LG in 2005, and Motorola Mobility Holdings Inc (NYSE:MMI) in 2006 to 2007.

According to them, the phone business is fickle and the notion of an ecosystem is also waning as Spotify, Gmail, Dropbox, and other applications allow users to switch between different platforms.

They said, “The bottom line is while Apple Inc. (NASDAQ:AAPL) may stem any near-term share price declines with its aggressive share buy-back program, we think the industry is maturing and that margins have peaked.” Ahmad and Beaubois emphasized that they are “fervent sellers” of Apple Inc. (NASDAQ:AAPL), Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB), Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V), and HTC Corp (TPE:2498).

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