Apple Inc (NASDAQ:AAPL) could see margin expansion due to higher ASPs of its latest iPhone models.
The latest price movement in Apple Inc (NASDAQ:AAPL) stock suggests reversal of market sentiment towards the stock. Apple stock has made some good gains in the last couple of weeks. And Apple technical analysis suggests strong bullish momentum in Apple stock. Shares of the iPhone maker had come under pressure recently, after the company's recent product launches received mixed reviews. There were several issues relating to the quality of the recently launched products, especially the Apple Watch 3 series. The lackluster demand for iPhone 8 series and reports of supply issues relating to several critical parts of iPhone X also led to the buildup of negative sentiment around the stock. Lower demand for iPhone 8 and iPhone 8 Plus also had many investors worried about Apple's ability to meet its fourth-quarter earnings guidance.
There were also surveys which showed that lower than expected number of iPhone users were willing to upgrade to the latest models. As we have discussed earlier, the success of iPhone is greatly dependent on existing customers upgrading to the latest models. Apple stock had rallied over 30% in the past one year on the hopes of an "iPhone Supercycle". The latest iPhones have to deliver to sustain Apple stock's current valuation multiples.
Apple Inc technical analysis.
Given the bearish sentiment, Apple stock corrected by over 8% from its peak in the beginning of September. However, the stock has bounced back after testing the 100-day moving average. The 100-day moving average has acted as a strong support for Apple stock over the past six months. Apple stock has regained some its lost ground in the last couple of weeks, after testing the 100-day moving average. Apple stock has gained over 6% and technical charts suggest, Apple stock could go even higher from here.
Apple stock made a bullish crossover with the 50-day moving average resistance line in yesterday's trade. A crossover with the 50-day moving average is generally considered a strong technical signal. Apple stock has gained over 1.8% in yesterday's trade after analysts at KeyBanc raised their price target on AAPL stock. The bullish crossover was further reinforced by the Moving Average Convergence Divergence (MACD) indicator, which is also generating a bullish signal. MACD crossed above the zero centerline during yesterday's trade. The moving average crossover and MACD indicate that Apple stock still has some upside left.
Apple stock gets a price target upgrade.
In another positive news, Apple stock received a rating upgrade on Sunday. KeyBanc’s Andy Hargreaves upgraded the stock to Overweight on Sunday, as he expects strong high-end demand for the latest iPhone models. Hargreaves thinks that many iPhone enthusiasts will rush to get the iPhone X when it comes out on Nov. 3, which could boost Apple's profit margins. iPhone X starts at $999 for a 64 GB model, much higher than its previous versions. Moreover, iPhone X doesn't have a 128 GB version. The next model available is a 256 GB version which costs around $1149. According to a survey conducted by RBC Capital Markets, more than half of the respondents who indicated an intention to buy the iPhone X said they’d choose the option with the higher storage, meaning higher ASPs for Apple.
The prices of iPhone 8 / iPhone 8 Plus are also higher than iPhone 7 / iPhone 7 Plus prices last year. Guggenheim expects a 17%Y/Y increase in iPhone ASPs to $770. "Apple's pricing actions with iPhone X, iPhone 8/8+, and storage configurations suggest the Company is transitioning to a more aggressive market segmentation strategy that seems likely to increase average gross profit per iPhone user and drive FY18 gross margins above levels in FY17" Hargreaves wrote in a recent note to clients.
Also, according to Hargreaves, suppliers will bear the large part of the increase in the cost of production of iPhone X. As per his calculations, iPhone X costs will be about $75 above the cost of an iPhone 8+, after accounting for the costs of the OLED panel and incremental component costs, including the 3D sensing module, which is well below his previous estimate of $150. He thinks the higher mix could boost iPhone’s ASP this fiscal year to $800, above the average estimate of $725 and above Guggenheim's estimate of $770.
Other analysts also expect Apple margins to get a boost due to higher priced models. RBC Capital raised its Apple stock price target to $180 despite its survey showing a lower number of prospective iPhone customers willing to buy the newer model than last year, as it expects higher margins to make up for lower demand. However, there are still concerns around whether Apple can meet its Q4 guidance given the weak sales of iPhone 8. Apple is scheduled to report its fourth-quarter earnings report on Thursday, November 2, 2017. Apple's management expects fourth-quarter revenue to be between $49 billion and $52 billion. At the mid-point, the guidance represents 8% year-over-year growth in revenue over last year's fourth quarter revenue of $46.9 billion.
On the whole, analysts remain bullish about the long term prospects of Apple stock. Apple stock is part of our top stock picks from the tech sector which have outperformed the Nasdaq Composite by over 265%.